Crypto Mining Tax Guide 2024

Crypto mining is a means of generating Bitcoin and other cryptocurrencies and verifying new blockchain transactions. It involves large, decentralized networks of computers that verify and secure blockchains.

In exchange for their contributions, cryptocurrency miners receive new tokens as a reward. Miners help to maintain and secure blockchains by providing processing power, and the blockchains award coins as an incentive.

Read on: What is Bitcoin mining?

US-based crypto miners of Bitcoin, Ethereum, or other cryptocurrencies can anticipate paying taxes on crypto mining as:

• Regular income at the time of mining.

• Crypto capital gains when the mined tokens are disposed of later.

A crypto taxable event occurs when the mined crypto is deposited into your wallet. At that moment, you owe taxes on the value of the crypto as income based on its fair market value when it is earned. This obligation stands regardless of any subsequent gains or losses in the crypto's value throughout the remainder of the tax year.

For this reason, it is very important to keep detailed records on Bitcoin or other crypto mining: when coins were earned, how much was earned, and what its fair market value was when earned.

You will also owe capital gains taxes on mined crypto if when you ultimately dispose of it, it has increased in value. To use the example above, if you sold the .25 BTC you mined when it was worth $9,000, you would owe capital gains tax on the $1,500 increase in its value.

When do I pay income tax on mining rewards?

Mining rewards are taxed as ordinary income at their fair market value on the day you receive them. For instance, if you mined 0.5 BTC on June 20th, 2024, US taxpayers will typically owe income tax based on the price of Bitcoin in dollar terms on that date.

Quarterly Bitcoin mining tax

In the US, crypto miners must be aware of the potential need to pay quarterly taxes on their earnings. This applies if the total tax owed for the year is expected to exceed $1,000. Under the American pay-as-you-go tax system, miners must estimate and pay taxes on their income every quarter to avoid a large tax bill at the end of the year.

These quarterly payments, also known as estimated taxes, can be calculated using IRS Form 1040-ES and are due four times a year: April 15, June 15, September 15, and January 15 of the following year. Accurate record-keeping of the fair market value of mined crypto on the day it was received is crucial for these calculations.

Penalties when failing to pay crypto mining taxes

Miners who fail to pay quarterly taxes might face underpayment penalties when filing annual tax returns.

However, safe harbor rules can help avoid these penalties if specific conditions are met, such as paying 90% of the current year's tax liability or 100% of the previous year's tax liability for those earning less than $150,000 annually.

For higher incomes, paying 110% of the previous year's tax liability or 100% of the current year's tax liability is required. Using crypto tax software or consulting with a qualified accountant can simplify the process and ensure accurate tax payments.

There are several simple ways to minimize taxes on crypto mining. Here are some options:

• Run your crypto mining activity as a business and write off expenses, as outlined above.

• Invest using an IRA.

• Consider a crypto tax-loss harvesting strategy to take advantage of dips in the market and minimize capital gains year-over-year.

• Leverage our crypto tax software and apply one of numerous crypto accounting methods to minimize your tax liability.

• Relocate to one of a number of crypto tax-free countries with little or no taxes on crypto mining.

• Donate crypto or consider gifting crypto to friends, family, or a charity.

• Sell crypto during low-income periods.

As noted, US-based crypto miners can anticipate two types of taxation on their crypto mining rewards: income tax on the fair market value of the mining rewards upon receipt, and capital gains taxes upon disposal.

Mining income (rewards) themselves are not taxed twice unless the crypto is disposed of later, at which point the usual capital gains rules apply.

If your mined crypto decreases in value, you may benefit from crypto tax-loss harvesting to minimize capital gains taxes. Note that crypto miners outside the US are subject to different tax rules.

Read on: How to calculate crypto taxes

How to report crypto mining on taxes depends on your region and whether your crypto mining income was derived from activity as a hobby or a business.

As noted, US-based taxpayers can anticipate paying taxes on mined crypto as both income and capital gains.

Read on: How to report cryptocurrency on taxes

Validator nodes constantly run online software, staying up-to-date on all or part of the chain's ledger to validate transactions and reach consensus. On proof-of-work (PoW) chains like Bitcoin, validator nodes are not financially rewarded.

Rather, their work enables miners, who compete to calculate a hash the quickest, to add new blocks to the ledger and receive Bitcoin in return.

However, on proof-of-stake chains, such as Ethereum 2, blocks are not "mined," rather they are "forged" or "minted" by the validator nodes themselves, which are required to have staked coins to the network. When a node is selected to add a new block, the staker is rewarded with coins. These rewards are taxed as income, just as mined crypto would be.

Looking to calculate your crypto profit? Try our free crypto profit calculator.

Whether you mine crypto as a hobbyist or professionally under a formal business will determine how to report cryptocurrency on taxes for mining each year. For example, crypto miners operating under a business can deduct certain expenses.

Here’s a breakdown of crypto mining tax implications as a hobbyist and business.

Crypto mining taxes for a hobby crypto miner

Bitcoin, Ethereum, or other cryptocurrencies mined as a hobby should be reported on Form 1040 Schedule 1, Line 8, as "Other Income." This income is taxed at your regular income tax rate.

This approach to mining taxes is the simplest. However, hobby mining is not eligible for business deductions.

Taxes on crypto mining as a business

To establish your mining operation as a business, you must incorporate it or set it up as a sole proprietorship. Although sole proprietorships require no legal filing, they offer no liability protection. For this reason, many choose to incorporate their crypto business as a pass-through entity (a partnership, LLC, or S Corp) or a C corporation.

Depending on the legal structure you choose for your mining business, you may need to report and pay crypto self-employment taxes.

If you treat your mining as a business, earned Bitcoin is reported as income on your Form 1040 Schedule C.

Crypto mining can be costly, so there are incentives to treat it as a business and write off expenses. Miners should always consult with a crypto tax professional to determine appropriate deductions.

Make sure to keep careful documentation of any claimed deductions in case of a crypto tax audit. Some common mining business expenses include:

Crypto mining and electricity

Electricity is typically one of a crypto miner’s largest expenses. Power used exclusively for mining may be deducted as a business or trade expense. This means that if you are mining in your home or another property that uses electricity for purposes other than mining, you may only deduct the portion of your electricity bill attributable to Bitcoin mining.

Keep careful documentation of your business’s electricity usage. A separate meter may help with this calculation.

Crypto mining equipment

In most cases, the purchase price of a rig may be deducted in the year of its purchase using a Section 179 depreciation deduction. This deduction allows companies to treat tangible business-related purchases as expenses rather than requiring them to be capitalized and depreciated.

Suppose your crypto tax professional does not find a Section 179 depreciation deduction appropriate for a mining-related purchase. In that case, the cost of that equipment may be deducted over several years (typically 3 to 5) using the modified accelerated cost recovery system (MACRS).

Additionally, the repair cost of mining equipment may be deductible as a trade or business expense.

Crypto mining office space

The rental expense may be deductible if you rent space to house your mining rig. If you mine out of your home, whether you rent or own it, you may be eligible for the home office deduction.

If so, you can use the IRS’s guidance to calculate the portion of your housing costs that you can deduct, or use the simplified option, which deducts a set rate of expenses based on the amount of square footage occupied solely by your business.

Crypto mining losses

Crypto mining hardware and electricity expenses, combined with the famously volatile crypto market, mean that a mining business can lose money over a tax year. In this case, losses may be offset by other income.

Crypto tax software to help reporting crypto mining

Crypto tax software like ours at TokenTax can be an enormous help when determining how to report crypto mining on taxes. A crypto tax calculator is a piece of software that helps to calculate cryptocurrency profits, losses, income, and corresponding tax liabilities.

TokenTax is the industry-leading crypto tax calculator and full-service accounting firm that provides everything you need in order to completely and accurately file your crypto mining taxes. Our platform integrates with dozens of popular exchanges and wallets to simplify crypto mining tax reporting.

Consult a crypto tax professional for additional guidance, and consider TokenTax VIP for full-service crypto accounting.

Failing to report cryptocurrency mining rewards can result in penalties, interest, and potential legal action from tax authorities. To avoid these consequences, accurately reporting and paying taxes on all mining rewards is crucial. Learn more about what happens if you don’t file crypto taxes.

Yes, tracking your mining rewards and associated taxes on an ongoing basis is essential. Keeping detailed records helps ensure accurate reporting and simplifies tax filing.

You may need to pay estimated quarterly taxes if you earn a significant amount from crypto mining. This helps to avoid underpayment penalties when you file your annual tax return.

Crypto mining taxation varies widely by country. Some countries may have favorable tax laws for miners, while others impose strict regulations and high taxes. Researching and understanding the tax laws in your country of residence is important. See our helpful country guides for more details.

Miners sometimes have the opportunity to "pre-mine," or mine coins prior to an Initial Coin Offering. Because these coins are mined before there is a market for them, it is not clear how one would determine their cost basis for tax purposes.

There is no explicit guidance from the IRS on this topic. We recommend working with your crypto tax accountant to determine a fair market value. However, if a given coin is truly illiquid, it is likely that reporting a cost basis of $0 is not unreasonable.

For reference, here are the 2022 and 2023 federal income tax brackets.

U.S. income tax brackets (2023 tax year, due 2024)

U.S. income tax brackets (2022 tax year, due 2023)

Here are answers to some frequently asked questions about crypto mining taxes and how to report crypto mining on taxes.

Is cryptocurrency mining taxable?

Yes. The IRS taxes the income you receive from crypto mining as ordinary income based on the fair market value on the day you receive the mining rewards. If you sell the mined crypto later, capital gains rules also apply.

Should I report my mining activity as a business or a hobby?

As previously noted, operating a crypto mining business provides legal protections and allows for various tax deductions. While hobby mining is easier to set up and manage for tax purposes, those who mine professionally will likely benefit more from establishing a formal business to maximize their returns.

Can the IRS track crypto mining?

Yes, the IRS has partnerships in place that allow them to monitor activities on the blockchain and connect individuals to accounts through know-your-client (KYC) processes on popular centralized exchanges. The best approach is to assume the IRS knows as much about your transactions and crypto activity as you do, and to report accordingly. Our expert team at TokenTax can help.

Do you have to pay taxes on crypto if you don't cash out?

Yes, typically, whether you sell mined crypto or not, you will be expected to pay income taxes on the value of the mined crypto. For US-based taxpayers, crypto mining is taxed as income upon receipt of the mined crypto (rewards) and as capital gains upon the sale of those rewards. If you do not sell your mining rewards, capital gains taxes do not apply.

Will there be a 30% tax on crypto mining?

The Treasury Department proposed a 30% excise tax on crypto mining businesses in 2023. As of now, it remains unclear whether this proposed tax will pass Congress and become law.