In the crypto tax space there is frequent mention relating to taxpayers’ responsibilities to calculate and report capital gains and losses on an IRS 8949 cryptocurrency tax form. What often gets overlooked is the tax implications and potential deductions for mining cryptocurrency such as bitcoin. Mining cryptocurrency has a unique problem of creating multiple tax implications that must be reported on separate forms. Fear not, TaxBit’s cryptocurrency tax software clears up this confusing paradox and ensures proper capital gain/loss and ordinary income tax reporting.
On October 9, 2019 the IRS released long awaited guidance on the taxation of cryptocurrency through Rev. Rul. 2019-24 and an FAQ. The IRS guidance brought cryptocurrency in even more alignment with the tax rules on equities. With increased enforcement on cryptocurrency tax evasion, proper reporting is more important than ever. Specifically, miners need to be aware of: 1) the tax implications of mining crypto; 2) the tax implications of selling or trading mined crypto; and 3) available mining deductions.
1. The Tax Implications of Mining Cryptocurrency
Pursuant to IRS Notice 2014-21, when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. This means that successfully mining cryptocurrency creates a taxable event and the value of the mined coins must be included in the taxpayer’s gross income at the time it is received.
Taxpayer’s receive a W-2 from their employer or a 1099 if they were an independent contractor that reports the gross income they received for the applicable tax year. Mining is a unique situation because there is no employer to issue a W-2 reporting on gross income. Furthermore, most mining companies are also not issuing 1099’s reporting the income received. This means that mining is most akin to self-employment income and must be voluntarily reported in order to avoid hefty fines and audits.
TaxBit’s cryptocurrency tax software specializes in identifying mining receipts and allocating them in accordance with IRS regulations. Taxpayers who mined will be provided with an itemized ordinary income breakdown to allow them to accurately report their income. After itemizing the receipts, the final amount will be added to the taxpayer’s other income they received throughout the year. The IRS largely classifies mining income as self-employment income, therefore taxpayers may be responsible for self-employment taxes on mined income.
2. The Tax Implications of Selling Mined Cryptocurrency
Selling mined cryptocurrency creates a second taxable event. The value of the cryptocurrency at the time it was mined (the amount included as ordinary income) becomes a taxpayers cost basis in the capital asset. When a taxpayer sells mined crypto then the amount received will be reported as proceeds and will be offset against the miner’s cost basis in the asset. If the value of the crypto is higher at the time of the sale, then the taxpayer has a capital gain. If the value is lower then the taxpayer will have a capital loss. Every sale or trade of mined crypto must be reported on an IRS 8949 cryptocurrency tax form.
3. Available Mining Deductions
If you mine cryptocurrency as a trade or business, then you may be eligible for certain deductions to lessen your tax liability. § 162 of the Internal Revenue Code states “[t]here shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Miners may deduct certain expenses from their mining income.
Some estimates place the annualized global mining revenues at ~$5.6 billion and global mining expenses at $3.6 billion. These statistics show that expenses may account for greater than 50% of the income received from mining. Some frequent expenses that may be eligible for the trade or business expense deduction include: mining equipment; electricity costs; repairs; and rented space used to operate the equipment.
Miners may deduct the cost of their mining equipment from their ordinary mining income. If the mining equipment exceeds $1 million in costs the taxpayer may need to use the modified accelerated cost recovery system (MACRS) to determine how to depreciate the equipment for tax purposes.
(ii) Electricity Costs
A large cost to mining cryptocurrency is the price of electricity. The energy used worldwide to mine cryptocurrency is equivalent to the energy consumption of the country of Australia. Electricity costs are an expense that if properly documented may be eligible for the trade or business deduction. To properly document your electricity costs you should track the amount of electricity that is used solely for mining. If you are mining from your residence then you will need to track and allocate the amount that is attributable to mining. Therefore, if you mine from your residence then you should use a seperate meter to ensure you can properly allocate the energy consumption from mining. It is important to track the electricity costs from mining because you may only deduct business expenses are not eligible to deduct the electricity costs that you used for your residence.
If your mining equipment needed repairs during the year then this expense may be eligible for the trade or business deduction. You should save receipts to validate the expenses in the event of an audit.
(iv) Rented Space
If you rent a space to hold and run your mining equipment then you may be eligible to deduct the rental costs as an expense. If your mining equipment is located at your residence then this will be treated similar to a home office and may be more difficult to deduct the expenses. See the rules applicable to the home office deduction to see if you are eligible to deduct costs for the business use of your home.
The IRS aggressively enforces tax reporting on mining and selling cryptocurrency. Fortunately, miners may be eligible for certain deductions to lessen their tax liability. TaxBit specializes in reporting mining income, accounting for selling mined crypto, and claiming applicable deductions.
-Written by Cryptocurrency Tax Attorney Justin Woodward