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How is bitcoin mining taxed?
Bitcoin mining is taxed as regular income. A taxable event is triggered when earned bitcoin is deposited into your wallet. This means you will owe crypto mining taxes on the bitcoin’s value at the time it is earned, regardless of any gains or losses to its value during the rest of the tax year. For this reason, it is very important to keep detailed records on mined bitcoin: when it was earned, how much was earned, and what its value was when earned.
For example, say you earned .25 BTC from mining on a day on which bitcoin was valued at $30,000 (.25 x $30,000 = $7,500). At the end of the tax year, the price of BTC has risen to $36,000 (.25 x $36,000 = $9,000). However, because the taxable event is realized at the time bitcoin is deposited, you would still be taxed on $7,500 of income even though the current value of the asset is $9,000.
How is bitcoin mining income reported on your taxes?
Where you will report your bitcoin mining income depends on whether you’ve mined it as a hobby or as a business. The determination of whether your operation is a hobby or a business is left up to you; there are pros and cons to each approach.
Mining as a hobby
Bitcoin mined as a hobby is reported on your Form 1040 Schedule 1 on Line 8 as “other Income.” It is taxed at the rate that corresponds to your income bracket.
This approach to mining taxes is the simplest. However, hobby mining is not eligible for business deductions.
Mining as a business
To establish your mining operation as a business, you need to incorporate it or set it up as a sole proprietorship. Although sole proprietorships require no legal filing, they also offer no liability protection. For this reason, many choose to incorporate their business as a pass-through entity (a partnership, LLC or S Corp), or a C corporation. If you choose to treat your mining as a business, earned bitcoin is reported as income on your Form 1040 Schedule C.
Once your mining operation is established as a business, you may deduct some of your mining costs as business expenses.
What can I deduct if I treat my mining operation as a business?
Mining is a costly process, so there are incentives for treating it as a business to write off expenses. Miners should always consult with a crypto tax professional to determine which deductions are appropriate. Make sure to keep careful documentation of any claimed deductions in case of an audit.
Some common mining business expenses include:
In most cases, the purchase price of a rig may be deducted in the year of its purchase using a Section 179 depreciation deduction, which allows companies to treat tangible business-related purchases as expenses rather than requiring them to be capitalized and depreciated.
If your tax professional does not find a Section 179 depreciation deduction appropriate for a mining-related purchase, the cost of that equipment may be deducted over the course of several years (typically 3 to 5) using the modified accelerated cost recovery system (MACRS).
Additionally, the cost of repairs made to mining equipment may be deductible as a trade or business expense.
Electricity is one of miners’ 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. Make sure to keep careful documentation of your business’ electricity usage. A separate meter may help with this calculation. Consult a crypto tax accountant for additional guidance.
If you rent space to house your mining rig, the rental expense may be deductible.
If you mine out of your home, regardless of whether you rent or own, 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.
The hardware and electricity expenses of a mining rig, combined with a volatile crypto market, mean that it is possible for a mining business to lose money over the course of a tax year. In this case, losses may be able to offset other income.