Schedule C or LLC for Cryptocurrency Earned from Crypto Mining
Crypto mining is quite different from other sources of income because there’s no employer to issue you a W-2 reporting for your total gross income. Besides that, most crypto mining companies don’t also issue any 1099s to report all of the income they receive, which even makes taxes more complicated.
Moreover, reporting the crypto earnings that you mined will be based on the fact of crypto mining as a business or as a hobby. If you’re mining virtual currency as a hobby, you have to report all of your mined crypto earnings using Form 1040 Schedule 1 and put it on the provided space that says “other income.” On the other hand, if you do mining as a business, you have to use Form Schedule C to report all of your mined crypto earnings. On top of that, you have to settle your self-employment taxes, and you may also be eligible for some deductions.
So reporting your earnings from crypto mining can have a complicated process. That’s why you need to completely understand how the potential deductions and tax implications work on crypto mining. Hence, to help you out here’s everything you need to know about Schedule C or LLC for cryptocurrency earned from crypto mining.
Btw, we’ve written an entire guide on reducing taxes on cryptocurrencies as well as the top 9 crypto tax software.
When should you file a Schedule C?
If you’re new to the crypto world, you may be wondering how and when you should file a Schedule 1 when processing your tax returns in the Internal Revenue Service. Schedule 1 is an IRS Form 1040 that you have to use to report your ordinary income. Even though the profit you earned from crypto activities is usually reported as capital gains, some situations may require you to report and recognize it as your ordinary income. So you need this particular form in filing your returns.
Moreover, if you want to treat your crypto mining as a business, that’s the time you have to report the profit you earn using Schedule C, which is the IRS Form 1040. So the said profit will be part of your regular taxable income, and it will be based on the crypto’s fair market value at the time you earn it at the regular tax rate. Besides that, the capital gains you will owe from these profits will also depend on how long you’ve been holding it.
When Should You Start an LLC for Your Crypto Mining Business?
When you do crypto mining, you can treat your activity as a hobby or a business. Whatever you choose, you have to understand the tax implications in any of them. However, when you treat your crypto mining as a hobby, you will not qualify for business deductions. So if you decide to treat it as a business, you have to set it up as a sole proprietorship. Even though it requires no legal filing, sole proprietorship offers no liability protection as well. But many crypto miners ask, “Should I start an LLC for crypto mining?” With that, many crypto miners want to choose to incorporate their business as a partnership, S Corp, LLC, or a C corporation.
It’s because after establishing your crypto mining as a business, you are now eligible for a deduction from your mining costs as your business expenses. You may all know that crypto mining is costly. So if you are a crypto miner, the IRS will give you incentives when you treat your activity as a business to write off your expenses. However, you may still need to get in touch with a tax professional for further assistance. Also, it’s vital to keep all of the detailed records, proofs, and documentation of any expenses and claimed deductions in case the IRS conducts an audit for your account.
Cons of Creating an LLC for Crypto Mining
There are some benefits of creating an LLC for crypto mining, which include the tax benefits you will get upon filing your returns. However, there are also some cons that you need to be aware of and here are some of them below.
Complexity
One of the big cons of creating an LLC for crypto mining is its complexity in the process. Since you have to file your legal taxes as a corporation, filing your returns will become more complicated and stressful. You may find some platforms online to help do the job for you, but you may still need assistance from a tax professional to make sure you’re doing the thing throughout the processing of filing your owed taxes.
It Can Cost You More Money
Another downside of creating an LLC for your crypto mining is that it can cost you more money. It’s because you need to pay for the franchise fees on a yearly basis and even pay for a registered agent. The amount may vary, depending on what state you’re living in. Besides that, since filing tax returns in this situation is very complex, you may need to hire a professional with particular expertise and experience in handling cases like this, causing you to pay more for their services.
Time-Consuming Process
The process will surely take long to unwind a corporation if you decide not to trade cryptocurrency anymore. You have to submit the required dissolution documents and forms through the mail and settle any fees you owe with your physical check. Then, you have to wait for the response before proceeding with the next part of the process. But there will be no particular timeframe of when you will receive their response and even a specific date to complete your request.
FAQs
Is cryptocurrency mining considered a business?
In your tax returns, you always need to disclose whether you received the coins from crypto mining as a hobby or a business. It’s because if you treat it as a business, you need to understand its tax implications and submit all of the forms you need to fill out, including other relevant documents and information upon processing your tax returns within the tax year. Also note that there are tax implication of crypto airdrops.
Is crypto mining a hobby or business?
If you are mining crypto, you have the options to treat that activity as a business or as a hobby. Whatever you choose has a set of corresponding tax implications that you need to be aware of. Besides that, treating it as a hobby may give you an easier job to do. However, treating it as a business may have a complicated process, but it will also give you more tax benefits and deductions. There are several IRS factors that you must consider to determine whether it’s hobby or business:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
How to report cryptocurrency on taxes?
Reporting any income you’ve earned from crypto mining will depend on whether you treat that activity as a hobby or a business. You have to fill out and submit Form 1040 Schedule 1 when you treat your crypto mining as a hobby. Then, on line 8 of the said form, you have put “other income” before submitting it to the IRS. Also, the tax rate will depend on the bracket to where the income you are earning belongs. On the other hand, if you treat your crypto mining as a business, you have to use Form 1040 Schedule C. You must follow the guidelines and the complete instructions stated on the form before successfully filing it to the IRS.
Conclusion
Crypto mining has become popular to many investors of virtual currency not just in the United States but also in other countries worldwide. It may involve complicated technology, but when you do mining business, you don’t need to be an expert or acquire technical knowledge before you can start mining. So, anyone who wants to spend their time exploring crypto mining will have the opportunity to learn and earn from this industry of the crypto world. Just don’t forget that every time you earn, you have to understand every tax implication as discussed above for every transaction you make and activity you do in crypto mining.
