Have you received any cryptocurrency from mining? Unsure about how crypto mining is treated for tax purposes, or just want to know more about how to report income from mining for the next tax season? In this article, we will explain everything you need to know related to the taxation of crypto assets received from mining. We will also go into detail about how and which costs you are allowed to deduct to reduce your total tax burden.
Defining the Activity
First and foremost it’s important to recognize if the mining activity will be classified as a business or just a hobby that is treated differently for tax purposes. The IRS has published an answer regarding the distinction between a hobby and business activity, and here are some of the considerations they say you should look at:
- Do you maintain complete and accurate records of all your mining transactions?
- How much time and effort are you putting into the mining activity?
- Do you mine cryptocurrencies with the expectation of being profitable?
- Do you use any of the crypto received to pay for living costs or daily expenses?
- Are you actively doing changes to your mining configuration or setup to increase profitability?
- How much knowledge do you (or your advisors) have about cryptocurrency mining?
- Have you made a profit in the past, and are you currently profitable now?
- Do you expect to make a future profit based on the possible appreciation in value?
As should be clear from this list, it is not really straightforward to classify the activity as a business or just a hobby, and there are certainly some subjective considerations to take into account.
If you are mining cryptocurrency as a full-time job and you make a consistent profit, or if you rely on the mined coins to pay for your daily expenses, your activity will most likely be classified as a business. However, if you are just mining small amounts from your desktop computer in your spare time, you are likely to be considered just a hobbyist.
Any cryptocurrency received to your wallet from mining activity is taxed as income. The fair market value of the coins at the time you received them (the same day) should be used as the basis for your taxable income for both business and hobby mining.
Let’s say you have received ethereum (ETH) in your wallet on different days. You then need to calculate the value in your local currency (eg. USD) for each day. This is what it would look like if you have received ETH on five different occasions:
|Tx No.||Date||Amount Received||ETH Price||Taxable Income|
The total taxable income in this example is simply the sum of the fair market value for all transactions:
$1,230 + $1,710 + $1,680 + $1,020 + $900 = $6,540
How much tax you actually have to pay will depend on your personal tax rate. Assuming that you fall under the 24% income tax bracket, you would owe $1,570 in income taxes (0.24 * 6540).
If you struggle to keep track of the USD value (or the value in your local fiat currency) on each date you have received a cryptocurrency to your wallet, you may want to check out a crypto tax solution that does all the necessary calculations for you automatically, and can even let you generate PDF tax reports showing the total income amount you should report in your tax return.
Selling of Mined Coins
We have explained how to calculate capital gains in our Ultimate Cryptocurrency Tax Guide where the most important takeaway is that cryptocurrencies are treated similarly to property for tax purposes in many countries. This includes also the US and means that each time you sell, trade, or otherwise dispose of a cryptocurrency, you need to calculate the capital gains and report this on your tax return. In the US, capital gains shall be reported on Form 8949.
Let’s assume that we later decide to sell 14 ETH for USD in our previous example for mining ethereum. We sell these coins on the 20th of September 2020 when the price of ethereum is trading at $440, which means we receive approximately $6,160 in USD. To calculate the capital gains we need to also know the cost basis. Using the FIFO method, we find the cost basis this way:
$1,230 + $1,710 + $1,680 + $1,020 = $5,640
The resulting capital gains are then found as:
$6,160 – $5,640 = $520
This was a very simple example with only five transactions. If you have been mining cryptocurrency for a longer time, you may have several hundred transactions that you need to consider when calculating your capital gains. Please refer to our in-depth tax guide to learn more about the detailed tax treatment of cryptocurrencies.
How to Report your Income
As already discussed, the taxation of cryptocurrency mining is treated differently for activity classified as a business or just a hobby.
Mining as a Hobby
If you are from the US and mine cryptocurrency as a hobby, you should include the taxable income amount as Other income on line 21 of Form 1040 Schedule 1. You are quite limited to deducting any expenses associated with the mining (discussed more below), but expenses that are allowed should go on Schedule A (Itemized Deductions).
Mining as a Business
If you are doing crypto mining in a more professional manner, and the activity is classified as a business, you need to report the taxable income on Schedule C (Profit or Loss from Business). You are also allowed to fully deduct any expenses associated with the mining activity to offset your mining income. The net profit is then taxed as business income and is also subject to a 15.3% self-employment tax.
Same as for reporting income, any associated expenses should be reported differently depending on if the mining is classified as a business or hobby.
Expenses for Hobby Mining
Crypto mining expenses should be deducted on Schedule A as itemized deductions. This is not that great because these deductions give in many cases very little tax benefits for most hobby miners. To mention a few of the limitations, you are only allowed to deduct expenses exceeding 2% of your total gross income, and it doesn’t allow expenses for start-up costs or home office.
Most importantly, deducted expenses are only considered if you don’t take the standard deduction which for 2020 is $12,400. This means that you would actually pay more taxes by deducting mining-related expenses instead of using the standard deduction unless your total expenses exceed $12,400.
Expenses for Business Mining
If you are considering doing cryptocurrency mining as a business, you have much better options for deducting related expenses. Any ordinary and directly related expenses like a home office, start-up costs, and electricity are deductible against your income.
The general rule is that you need to prove all expenses reported on Schedule C. For example, if you are deducting your electricity costs, you need to prove the actual costs directly related to the mining activity. This can be done using a separate electric meter for your mining rig.
Cryptocurrency received from mining must be reported as income whether you are conducting the mining activity as a business or just a hobby. The tax treatment is different for business and hobby mining, and related expenses you are allowed to deduct vary also. If you are mining cryptocurrency today, or you will start mining sometime in the future, you need to consider all the factors discussed in this article when planning your mining operation to understand the possible tax implications.
If you have a large number of incoming transactions to your wallet or exchange from mining, it will quickly become a difficult task to keep track of all the data and convert the amount received to USD or other fiat currencies. Coinpanda is a popular tax solution today and is used by thousands of cryptocurrency miners to automatically keep track of all transactions and effectively reconcile the crypto received to USD, CAD, AUD, or other fiat currencies. You can even download a complete income report that breaks down all the details and tells you exactly what you need to report in your tax return.
You can sign up for a 100% free account by clicking here.
If you want to learn more about how cryptocurrencies such as bitcoin are taxed, please refer to our in-depth tax guides that are regularly updated: