IRS Guidelines on Crypto Mining Taxes

crypto mining taxes

In the world of cryptocurrency, taxpayers must report their capital losses and capital gains on their return during the tax season. However, many of them who make transactions for mining crypto tend to overlook the possible deductions and even tax implications. Besides that, everyone must include every transaction with their mined crypto on their return whether selling or trading it in the market. Any of these can be a taxable event that may incur appropriate taxes to the miners. 

Moreover, if you’ve been investing in virtual currency for quite some time now, you need to have a complete understanding about how the mining taxes work in cryptocurrency. These are the taxes that can easily get complicated and tend to create different tax implications. That’s why the Internal Revenue Service takes cryptocurrency mining taxes seriously across the country. Hence, to know anything about your legal obligations when you do crypto mining, here are the guidelines from the IRS that every taxpayer should observe and follow. 

What is the IRS Guidance on Crypto Mining Taxes?

Whenever your wallet receives a virtual coin, it triggers a taxable event like what will usually happen with your regular income. Besides that, as mentioned earlier, the taxes you owe from mining cryptocurrency depends on its fair market value on the date you earned it regardless of the fact whether you’ve gained or lost a profit. 

That’s why everyone investing in virtual currency should always keep all transactions recorded for tax purposes. It includes the value of the crypto when you earned it, the value of the capital gains or losses when you sold it, and even the exact date of receiving the crypto in your wallet. Moreover, many people reporting crypto taxes on their returns can be a little bit complicated. It’s because there’s no employer who will report your gross income by issuing Form W-2, and most of the cryptocurrency mining companies also don’t report the income you received by issuing Form 1099s

Hence, keeping records of all your crypto transactions will help you get rid of stress when filing your taxes during tax season. Besides that, as the IRS is continuously reinforcing tax evasion, crypto mining tax reporting is vital when filing returns. That’s why all miners should know about the crypto mining taxes and how to report them properly, tax implications when they trade or sell their mined cryptocurrency, and the qualifications they can qualify for deductions. 

How is Tax on Crypto Mining Calculated?

bitcoin mining taxes

Every time you dispose of your mined cryptocurrency, that’s a taxable event, incurring a capital loss of capital gain. The value of your crypto asset on the date you purchased it will be your cost basis. Then, to get your capital loss or gain, you have to deduct that value from the exact amount of the crypto when selling it in the market. 

Hence, you’ll have capital gains if the selling value of the crypto is higher than the cost basis. It also depends on the holding period and the total amount of the taxable income. However, you’ll have capital losses if the selling crypto value is lower than your cost basis. This is how you should determine the cryptocurrency mining taxes you owe on every successful mining of virtual currency. 

Is Crypto Mining Income Taxed Twice?

You may incur taxes in cryptocurrency mining twice, depending on whether you earn capital gains or losses. The moment you earn from mining a crypto, you have to pay for the corresponding taxes for it. Then, if its value has increased over time when you decide to sell it, you’ll be paying for the incurred capital gains taxes. However, if it’s selling value becomes less than its cost basis, it’ll be your capital loss, giving you tax benefits instead of incurring another owed taxes. 

Selling or Trading Mined Crypto? Beware of these tax implications.

You always have to be aware of the tax implications every time you sell or trade your mined cryptocurrency. Whenever you make any of these transactions, you have to report it on your return by filing Form 8949 during the tax season. In addition, every time you sell or trade your mined crypto, the taxes you owe will depend on its fair market value on the date you dispose of it in the market. As mentioned earlier, if the value of your crypto has increased when you dispose of it, you’ll incur corresponding capital gains taxes. Otherwise, it’ll be your capital loss, which will give you tax benefits in return. 

How to Report?

Reporting your income from mining crypto will depend on whether the transaction you did was a business or a hobby. If it’s a hobby, you have to file Form 1040 Schedule 1. You have put it on line 8 on the form as “other income,” and the crypto mining tax rate will depend on a particular bracket where your income belongs to. 

However, when you mine crypto as a business, you should establish it by organizing it as an LLC when reporting your return using Form 1040 Schedule C. Besides that, many people want to set up the business they have as a pass-through entity because it doesn’t have any liability protection and even legal filing. In addition, business miners will also need to pay for the self-employment tax. Hence, whenever you establish your mining transaction as a business, you can have some business and tax expenses from your mining costs. We actually have an entire article about Schedule C vs LLC for cryptocurrency earned from mining.

Crypto Mining Deductions

Since mining crypto may cause you to have different expenses, you’ll receive corresponding incentives or deductions when establishing it as a business. However, it’ll be best if you consult with a tax professional to identify the appropriate cryptocurrency mining tax deductions with proper documentation to include on your report. 

It includes your purchase of a crypto mining rig. For many companies, any tangible purchases are part of business expenses instead of treating them as something to be depreciated and capitalized. However, if the tax professional you consulted didn’t find it appropriate to include this purchase on the Section 179 depreciation deduction of the tax law, it can still be deducted using MACRS (or Modified Accelerated Cost Recovery System) after three to five years. Besides that, when the mining rig and other pieces of equipment that you use in mining cryptocurrency get repaired, whatever amount you paid for fixing them can also be a deduction as other expenses in your business.

Moreover, another deduction you’ll receive is from the power consumption used for your mining business. In fact, it’s usually the largest part of the mining business expenses that most miners have. But, you’ll only receive a particular deduction from your bill if you consume electricity for other purposes besides your mining business. That’s why having a separate meter installed can significantly help you determine the exact amount for the deduction. 

On the other hand, it’ll also be another deductible for you when you’re paying for rental fees where you house your cryptocurrency mining business. The good thing about it is that you may qualify for the home office deduction if you own the space for your business. You can use the housing tools to do the calculation with the guidance of the IRS. The amount of every square footage of the property you own that you exclusively use for mining crypto will be deductible as part of business expenses. 

Is there a way to avoid crypto mining taxes

Crypto miners can avoid paying their owed crypto taxes when they directly send their income to an IRA or Individual Retirement Account. It’s an investment account for people who want to save for their future and retirement. In addition, the Compass mining investors in the US who purchase mining hardware using their finds in their Choice IRA can avoid paying taxes from the Bitcoin they’ve mined and earned. It’s because of the agreement with the IRA, Compass clients can do cryptocurrency mining without incurring any tax obligations. 

FAQs

crypto mining tax calculation

Do I have to pay tax on mined crypto?

Every time you mine cryptocurrency, you owe an appropriate virtual coin tax when you’ve finally received it in your wallet. After that, if you decide to sell it in the market when it has increased its value, you owe capital gains taxes for that event. However, if the fair market value of the crypto when you sell it in the market is less than its cost basis, it’ll be your capital loss, giving you tax benefits instead of incurring additional crypto taxes. 

What tax deductions are available to crypto miners?

If you establish your crypto mining as a business, some of your mining costs will become your business expenses. Because of that, you qualify for appropriate deductions. It includes the electricity bill for the power you consume in running your crypto mining business. Besides that, if you’re renting a space, that’s another deduction you’ll receive as part of your business expenses. 

Moreover, if you own the property where you house your crypto mining, you may qualify for the home office deduction. The amount of every square footage of the property you own that you exclusively use for mining cryptocurrency will be deductible as part of business expenses. Besides that, the equipment you’ve purchased will be part of the expenses, including any repair costs in the future. Hence, these will also be another deduction you recieve when you set up your cryptocurrency mining as a business. 

Do I have to report mined crypto to the IRS?

Since your mined crypto is considered a property according to the tax law, you have to report it on your tax returns to the IRS. However, it depends on whether you did it as a business or a hobby. If it’s a hobby, you have to file Form 1040 Schedule 1. You have put it on line 8 on the form as “other income,” and the tax rate will depend on a particular bracket where your income belongs to. On the other hand, when you mined cryptocurrency as a business, you have to report it on your return using the IRS Form 1040 Schedule C. 

Conclusion

Filing mined digital currency tends to get quickly complicated because you have to use different IRS forms when filing your returns. Because of that, you have to know everything about cryptocurrency mining and its tax implications, so the IRS won’t conduct any further review on your account when you filed it correctly on the schedule stipulated on the form. Besides that, as a crypto miner, you also have to be aware of the particular qualification that will make you eligible for deductions that may significantly help you decrease your tax obligation during tax season. 

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