Cryptocurrency is considered ordinary income by the IRS. As such, it’s taxable in the United States. The IRS 8949 form is the cryptocurrency tax form.
Crypto mining taxes – things to know
- Cryptocurrency mining is ordinary income.
- When you cash out by converting your mined cryptocurrency into fiat (USD), it will be eligible for paying a tax on.
- You need to do your due diligence in reporting the USD equivalent of how much you mined when you withdrew the amount into a wallet you own (in the case of pool mining) or when you converted the amount into fiat.
You’re essentially using your hardware to do computational work. This is (distantly) like providing hosting service. As a result, all cryptocurrency that you earn in your wallet will be taxable when converted to fiat/USD.
How to properly report crypto mining income
Crypto mining income has to be reported alongside your ordinary income.
If you’re a casual miner or mining as a hobby, then you have to fill Form 1040 Schedule 1. It’s considered as ‘’Other income’’. On the other hand, businesses mining cryptocurrencies as a service need to report all their mining earnings using Schedule C (and are eligible for deductions).
Note that you need to correctly track and report USD-equivalent values of the mined amounts of cryptocurrencies.
Correctly reporting the fair market value of the cryptocurrency you mined at the time of receiving said coins in a wallet owned and operated by you as gross income is your responsibility.
How selling mined cryptocurrency is taxed
Mined cryptocurrency is seen as ordinary income. But what if you never withdraw it, and directly sell it? Is it still income?
The mined value is taxable as income. But if you sell this cryptocurrency instead, it’s a separate tax event.
This event can be broken down as:
- Withdrawing mined cryptocurrency to your owned wallet (first tax event – income is made).
- Converting this cryptocurrency into fiat.
- Selling the fiat for purchasing the same cryptocurrency.
- Profits or losses made on this capital asset.
This transition from income to capital asset might be a little difficult to comprehend initially. Of course, realistically speaking, you will be skipping steps 2 (to save on transaction fees) and 3 (to save on service/platform fees of exchanges). But that is how it can be seen.
If you made a capital profit by selling the mined cryptocurrency or exchanging it on Redot or similar crypto exchanges, then the capital gain will be taxable.
The capital gain or loss equals the cost basis deducted from the sale price. The cost basis here is equivalent to the value of the cryptocurrency when it was mined (when the withdrawal was made – as the price is prone to change during the process of mining even when you’ve surpassed the minimum withdrawal limit and haven’t withdrawn).
In simpler terms, if the value of the cryptocurrency is higher than the cost basis when you sell, you’ve made a profit. If it’s lower, you’ve made a loss on your income.
Can you deduct mining costs?
Mining businesses or farms are eligible for deductions.
But that’s not true for individuals mining.
More often than not, you’re mining in a pool. Solo mining is simply not as profitable, especially in the case of high market capitalization cryptocurrencies such as Bitcoin and Ethereum unless you can buy several expensive ASIC machines and keep them on 24×7.
Pool mining works in the following way:
- You sign up in a pool.
- You mine for the pool.
- The pool mines the cryptocurrency by using the combined total power (hashrate) of all the miners that are mining for the pool.
- The pool receives rewards by mining new blocks.
- These rewards are equally split among all miners who were mining for the pool depending on the hashrate they contributed.
Pools generally have a minimum payout limit. Until you cross this limit and make a withdrawal, you still don’t own any cryptocurrency. Suppose you’ve crossed the limit and managed to mine 1 ETH. Until you withdraw, your 1 ETH is with the pool.
It’s not taxable, even though you have done work.
The next step is usually withdrawing the cryptocurrency. In this case, you will withdraw the ETH held in the pool wallet to your personal ETH wallet. Whether you now choose to hold this cryptocurrency in your wallet or not, and regardless of how long you hold it for, it’s taxable.
The moment you receive the ETH in the wallet that you own, it becomes your property.
You need to note down the USD-equivalent value of the mined cryptocurrency at the time of receiving it in your wallet. This is the value that will be taxed.
If you don’t convert it and keep holding it, while realizing a 20% interest over a 1-month period (let’s say), and then you convert – this triggers a secondary tax event where your holding becomes a capital asset. This 20% capital gain is now taxable as per the tax rates on capital profits.
There are ways to deduct your tax liabilities using equipment costs, electricity costs, repairs, or rented space costs – but these are very hard to track and report in the case of casual cryptocurrency mining.
Hopefully, now you have a clear idea of what to expect in terms of paying taxes when you mine cryptocurrencies.
It’s important to understand that every transaction is a taxable event. It’s perfectly normal for cryptocurrency traders and miners to have to report hundreds or even thousands of separate taxable events. Each such event has to be itemized and recorded properly.
If it’s all too much for you, cryptocurrency tax software might be the way out. This software is capable of automatically syncing your wallets, blockchains, and exchanges to give detailed submission-ready reports with all your cryptocurrency transactions.