Taxes are complex, rarely fun, and very nuanced. As the discourse around crypto mining continues to grow, taxation has become a hot topic. Like any other business or individual who earns or generates income, crypto miners are liable for taxes.
This article summarizes key tax considerations and tax deductions for miners. The goal is to offer a starting point for miners searching for answers to cryptocurrency mining tax questions.
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Nothing in this post is meant to be financial advice nor should be construed as such. Always consult with personal tax and accounting advisors for more clarity. Much of this article is informed by a tax-related livestream hosted by Compass.
Common tax considerations for miners
Income tax
If an individual or business buys an ASIC then performs an economic activity (mines a cryptocurrency) and collects a mining reward, they have earned income. The time of reward received is when an income event is triggered. That income must be recorded as the fair market value at the time the miner has unrestricted access to the reward.
Capital gains tax
A miner will trigger a capital gain tax when they sell reward payouts received or their mining equipment. This includes the sale of mining rewards to cover operational expenses likes hosting fees.
Self-employment tax
The IRS has said that some miners will have to pay self-employment taxes. If a miner is classified as a trade or business, then they must pay self-employment taxes. Miners who classify their activity as a hobby (typically characterized as a small-scale mining operation) do not pay self-employment taxes. If a miner is mining with a centralized company that is doing all profit generating activities while the miner is just collecting a reward, this income would be classified as passive and not trade or business income. Thus, no self-employment taxes would be owed.
Bitcoin mining tax deductions and adjustments
Miners can make the following tax deductions depending on how their business is organized. Only miners classified as a trade or business are allowed to write off mining related expenses and record depreciation. A miner can classify themselves as a trade or business through a limited liability company (LLC) or as a sole proprietor.
Common deductions
Miners classified as a trade or business can claim deductions on the following:
- Office expenses
- Equipment repairs
- Equipment costs
- Electricity costs
- Pool fees
- Hosting fees
Hardware depreciation
Depreciation can be recorded using the following:
- Section 179: allows for the deduction of the entire purchase price of equipment in the year it was purchased (Read more)
- De minimis Safe Harbor rule: This rule lets you deduct depreciable property instead of capitalizing (delaying full recognition of an expense) it. The property/item must be under $2,500 (Read more)
- Depreciation using MACRS (Modified Accelerated Cost Recovery System) over a three to five-year period
199A deduction
The Section 199A deduction is a qualified business income (QBI) deduction that allows businesses, including miners to qualify for an additional 20% deduction. This deduction is limited to 20% of taxable income, less net capital gains (capital gains – capital losses).
Qualifications for full deduction:
- Taxable income is in the 24% marginal tax bracket or less
- Joint filers: less than $315,000 in taxable income
- Single filers: less than $157,500 in taxable income
- Domestically located business
If a miner’s taxable income is greater than $207,500, the deduction is limited by W-2 wages and depreciable assets. (Read more)
Gross income adjustments
Most of the above deductions can be made as adjustments to gross income. This simplifies tax reporting. Foreign miners who have a trade or business activity and file taxes in the United States get zero deductions and get taxed on gross income. These miners should work with foreign and domestic tax professionals to account for deductions in their adjusted income.
Tax implications on foreign mining operations
If a miner has access to other jurisdictions, they may be subject to foreign tax laws. In this case, they can form an LLC and treat it as a flow through entity from a US tax perspective. Foreign countries tax the LLC as a corporation, if they create a taxable presence in the foreign country under their rules, they won’t have a taxable nexus. Miners should work with foreign and domestic tax accountants to avoid underpayment taxes and interest.
Small miners should stick to mining in local jurisdictions to minimize risks and potential mistakes.
Overall, miners should take all the above into account when preparing their tax returns. As a reminder, nothing in this post is meant to be financial advice nor should be construed as such. Always consult with personal tax and accounting advisors for more clarity.