How to Report Crypto Mining Income on Your Taxes (2024)

Mining for cryptocurrency can be a major money-maker. It can also leave a miner scratching their head wondering just how much their tax bill will be at the end of the year. Use this guide to help you avoid any nasty surprises when it comes to the taxation of mining income.

What is Cryptocurrency Mining?

Mining is a process used by Proof-of-work (PoW) blockchains to verify transactions, maintain network security, and generate coins which are paid as rewards to miners.

Using powerful computers running complex mining algorithms, miners compete to be first to validate and verify a set of transactions called a block. Once each block is verified it is added to the blockchain.

The first miner to verify the block is rewarded with coins as a reward for their services. This acts as a financial incentive for miners to continue supporting the blockchain, i.e. maintaining the network and ensuring security.

Do You Have to Report Crypto Mining on Taxes?

Yes, cryptocurrency miners are required to report the results of their mining activity on their tax returns. The market value of the mined coins at the time of receipt will be treated as income. Furthermore, when the mined coins are sold or disposed of at a later date, capital gains or capital losses are incurred.

In other words, both of these trigger a tax event that results in tax owed to the government on the income earned.

Let’s better understand this with the help of an example:

Alex obtained 1 bitcoin as a reward on April 01, 2021. The market value of 1 bitcoin on April 01, 2021 was $50,000. Alex sold the 1 Bitcoin on April 15, 2021 when the market price of 1 Bitcoin was $60,000

This is what the income reported on Alex’s tax return for FY 2021 would look like:

Particulars Amount in $
Income from Mining:
Market value of 1 Bitcoin on April 01, 2021 50,000
Capital Gains:
Sale Value on April 15, 2021 60,000
Less: Cost*
(*Income already taxed as Mining
)
50,000
Taxable short term capital gains 10,000

Next let’s see how this would be taxed.

How Are Crypto Mining Rewards Taxed?

Income from mining of cryptocurrencies are subject to two tax events:

  1. Ordinary Income - based on the market value of coins at the time of receiving the rewards.
  2. Capital Gains - when the coins are sold or disposed of at a later date.

Ordinary Income

Mining rewards are taxed as Ordinary Income based on the market value of the coins on the date of receipt.

The tax rate charged on the said income will be according to the applicable slab rates. The slab rates for FY 2021 federal income taxes are below.

Rate For Unmarried Individuals For Married Individuals Filing Joint Returns Married filing separately For Heads of Households
10% $0 to $9,950 $0 to $19,900 $0 to $9,950 $0 to $14,200
12% $9,951 to $40,525 $19,901 to $81,050 $9,951 to $40,525 $14,201 to $54,200
22% $40,526 to $86,375 $81,051 to $172,750 $40,526 to $86,375 $54,201 to $86,350
24% $86,376 to $164,925 $172,751 to $329,850 $86,376 to $164,925 $86,351 to $164,900
32% $164,926 to $209,425 $329,851 to $418,850 $164,926 to $209,425 $164,901 to $209,400
35% $209,426 to $523,600 $418,851 to $628,300 $209,426 to $314,150 $209,401 to $523,600
37% $523,601 or more $628,301 or more $314,151 or more $525,601 or more

Note 1: Mining income reported as business income will also trigger a 15.3% self-employment tax.

Note 2: Income may be subject to additional state income taxes based on residence.

In the above example, Alex had a tax event on April 01, 2021 of receipt of 1 bitcoin as a mining reward. As a result, his income of $50,000 will be taxed as per his applicable federal tax slab rate.

Capital Gains

On the subsequent sale or disposal of mining rewards, capital gains or capital losses are incurred. The amount of capital gains made or losses incurred is dependent on the movement of price between the date of sale and the date of receipt of the mining rewards.

The formula to calculate gains/losses is simple:

Capital gain/loss = Sale price - Cost basis

In case of a favorable movement, meaning the sale price is higher than the cost basis, you will result in a Capital gain.

In case of an adverse movement, meaning the sale price is lower than the cost basis, you will result in a Capital loss.

It’s important to note that your tax rate for capital gains depends on the period of holding and amount of income.

Crypto assets held for equal to or less than 365 days will be classified as short term and those held for more than 365 days will be classified as long term.

The tax rate for short term capital gains is the same as ordinary income slab rates (refer to the above table).

The tax rate for long term capital gains varies between 0% to 20% (refer to the below table).

Rate Single Head of household Married filing jointly Married filing separately
0% $0 to $40,400 $0 to $54,100 $0 to $80,800 $0 to $40,400
15% $40,401 to $445,850 $54,101 to $473,750 $80,801 to $501,600 $40,401 to $250,800
20% Over $445,850 Over $473,750 Over $501,600 Over $250,800

How Should Crypto Miners Report Income?

When reporting income from crypto mining on your taxes, you’ll need to first make a determination on whether your mining was a hobby or a self-employed business. Mining income can be reported either as hobby or business income and this affects whether you can claim deductions to lower your taxes and whether you need to pay additional self-employment tax.

The IRS provides a list of factors which can be used to determine if mining activity is a hobby or business income. Some of the factors are:

  1. Whether accurate and complete books of accounts and records are maintained
  2. Expertise of taxpayer or advisors
  3. Time and effort invested in the activity indicates an intention to make profit
  4. Expectation of appreciation in price
  5. Success in making a profit in similar activities in the past
  6. Amount of occasional profits earned

To summarize, operating a mining farm on a large scale will be classified as business income. Mining from an old computer or on a personal level will be classified as a hobby.

Reporting for Mining as Hobby

The value of coins received as mining rewards should be reported in Point 8z - Other Income of Form 1040 Schedule 1 Part I. Ensure you report the nature of income as “Mining rewards”.

How to Report Crypto Mining Income on Your Taxes (1)

No expenses deduction will be allowed if income is reported as a hobby.

Reporting for Mining as Business Income

Business income and expenses will be reported in Schedule C (Profit or loss from Business) of Form 1040 or other business returns depending on the nature of the business entity (Form 1065, Form 1120, Form 1120S).

How to Report Crypto Mining Income on Your Taxes (2)

In case of business income, self-employment taxes will also be payable at 15.3%. Remember to maintain your books of accounts and records in case of an IRS audit.

The upside of reporting mining as business income though is that it will provide deductions of business expenses from your taxable income.

What Tax Deductions Are Available for Mining Businesses?

Reporting mining as business income will allow you to write-off expenses associated with the business. This will help reduce your overall tax liability.

Some of the expenses that mining businesses can write-off are:

1. Electricity:

This is one of the biggest expenses of a miner. It is important to maintain proper records of electricity used solely for mining purposes. If mining from home, it’s best to use a separate meter to maintain a track of units of electricity used.

Proper documentation will ensure deduction for electricity is allowed and can be used to justify the cost in case of an IRS audit.

2. Equipment used to mine:

There are two opinions on claiming expense deduction for mining equipment:

  • Option 1:Section 179 deduction

Section 179 allows companies to deduct tangible assets directly as expenses in the year of purchase rather than capitalizing it and charging depreciation.

This can be used as an option where the amount of equipment purchased in a year is up to $2.7 million.

  • Option 2:Depreciation

You can capitalize the cost of mining equipment purchased and claim depreciation as per modified accelerated cost recovery system (MACRS) as expense deduction.

3. Repairs

Hardware equipment used for mining can break down and require repairs. All expenses incurred during the year for repair could be claimed as an expense deduction.

Ensure you keep all invoices as records to avoid disallowance of expense in case of an IRS audit.

Summary

The five most important things to remember about reporting income from crypto mining on your tax returns are:

  1. Mining income is taxed at two tax events. First, when the mining rewards are received as Ordinary income. Second, when such mining rewards are disposed of, as Capital gains.
  1. Ordinary income and Short term capital gains are taxed at applicable federal Income tax slab rates (additional self-employment tax and state income taxes may also apply).
  1. Long term capital gains are taxed between 0-20% based on the quantum of gains.
  1. Mining income can be reported either as Hobby or Business income. In case income is reported as a hobby, no deduction can be claimed for expenditure.
  1. Mining businesses can claim expenses as a deduction. However, proper documentation has to be maintained to justify the expenses in case of an IRS audit.

Have any more questions surrounding crypto mining and taxes? Schedule a call today!

Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.

How to Report Crypto Mining Income on Your Taxes (2024)

FAQs

How to Report Crypto Mining Income on Your Taxes? ›

You must report ordinary income from virtual currency on Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income PDF, as applicable.

How to report mining crypto on taxes? ›

Reporting for Mining as Hobby

The value of coins received as mining rewards should be reported in Point 8z - Other Income of Form 1040 Schedule 1 Part I. Ensure you report the nature of income as “Mining rewards”. No expenses deduction will be allowed if income is reported as a hobby.

How do I report crypto mining income on Turbotax? ›

How do I report cryptocurrency on my taxes? Cryptocurrency gains and losses should be reported on Form 8949 while cryptocurrency income should be reported on Schedule 1, Schedule B, or Schedule C depending on the nature of your earnings.

How do you show crypto income in income tax? ›

How to Report & Pay Crypto Tax in India in 2024
  1. Sign up and connect to a crypto tax calculator.
  2. Download your crypto tax report.
  3. Log into the Income Tax Portal and start your ITR-2.
  4. Report your capital gains in Schedule VDA.
  5. Report other income from crypto.
  6. Complete your other required schedules.
  7. Proceed to verification.

How does the IRS know you mined crypto? ›

Transactions on blockchains like Bitcoin and Ethereum are publicly visible. That means that the IRS can track crypto transactions simply by matching 'anonymous' transactions to known individuals.

Can I write off crypto mining expenses? ›

You have to report all your crypto income on your Form 1040, from crypto mining rewards to node income, staking rewards, crypto interest, NFT sales from your creations, and more. If you're a crypto mining business, you'd need to report your rewards as business income and you can deduct your mining related expenses.

How do you avoid taxes on crypto mining? ›

9 Ways to Legally Avoid Paying Crypto Taxes
  1. Buy Items on BitDials.
  2. Invest Using an IRA.
  3. Have a Long-Term Investment Horizon.
  4. Gift Crypto to Family Members.
  5. Relocate to a Different Country.
  6. Donate Crypto to Charity.
  7. Offset Gains with Appropriate Losses.
  8. Sell Crypto During Low-Income Periods.
Mar 22, 2024

How do I report crypto income to the IRS? ›

You must report ordinary income from virtual currency on Form 1040, U.S. Individual Tax Return, Form 1040-SS, Form 1040-NR, or Form 1040, Schedule 1, Additional Income and Adjustments to Income PDF, as applicable.

What happens if I don't report crypto on taxes? ›

Not reporting crypto losses can result in missed deductions against future capital gains, inaccurate tax filing resulting in penalties, fines, or increased IRS scrutiny, and an increased likelihood of an audit.

How do I declare crypto on my tax return? ›

Add the value of these under the heading 'Other income' in your tax return. Make sure to do this in the financial year you received it. When you later sell the crypto you earned through staking or airdrops, the amount you reported as income will be your cost base for calculating CGT.

What is the new tax law for crypto? ›

June 28 (Reuters) - The U.S. Treasury Department finalized a rule on Friday requiring cryptocurrency brokers, including exchanges and payment processors, to report new information on users' sales and exchanges of digital assets to the Internal Revenue Service.

Is bitcoin mining taxable income? ›

Crypto mining taxes for a hobby crypto miner

Bitcoin, Ethereum, or other cryptocurrencies mined as a hobby should be reported on Form 1040 Schedule 1, Line 8, as "Other Income." This income is taxed at your regular income tax rate.

How to withdraw crypto without paying taxes? ›

There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.

How to report mining income on tax return? ›

Fill Out IRS Form 1040: Report your mining income and expenses on Schedule C of IRS Form 1040. Report Capital Gains or Losses: If you've sold any of your mined cryptocurrencies during the tax year, report the capital gains or losses on Form 8949.

Can the IRS see your crypto wallet? ›

Cryptocurrencies are traceable, with transactions recorded on a public ledger accessible to the IRS. The IRS uses advanced methods to track crypto transactions and enforce tax compliance. Centralized exchanges provide user data to the IRS.

Can the IRS see my Coinbase wallet? ›

In certain situations, Coinbase does report to the IRS. However, this does not absolve individual taxpayers from their responsibility to report their own transactions. Coinbase's reports to the IRS can include forms 1099-MISC for US traders earning over $600 from crypto rewards or staking in a given tax year.

Is crypto mining considered earned income? ›

Mining crypto: If you mined crypto, you'll likely owe taxes on your earnings based on the fair market value (often the price) of the mined coins at the time they were received. Crypto mined as a business is taxed as self-employment income.

Do you have to report crypto under $600? ›

It's your responsibility to report your crypto to the IRS

If you use a centralized exchange, like Coinbase, and earn $600 or more in a given year, the exchange will send a 1099 miscellaneous form to both you and the IRS.

Do I need to report crypto if I didn't sell? ›

You can send any of your crypto between your personal wallets without paying any taxes; Even if you don't sell any of your crypto, you'd still need to answer the crypto question on Form 1040, including reporting your crypto income in your income tax return.

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