Are you looking to enter the Bitcoin mining business and wondering about taxes?
Recently, Bitcoin mining has been in the news, given the miners shift from China to other countries such as the US and Kazakhstan. China’s crackdown on Bitcoin miners forced many to shut down while others are relocating in search of cheap electricity and renewable energy sources.
As a result, Bitcoin’s mining difficulty is at a low point, increasing the chance for smaller players to profit in a very competitive industry.
Today, we explore all the tax implications of earning Bitcoin from mining activities.
In this article:
Do you pay taxes on Bitcoin mining?
In the US, if you receive Bitcoin or any other crypto from mining operations, you’ll have a taxable event. According to the IRS crypto guidelines, if you receive Bitcoin or crypto when performing a service, you need to recognize it as income and pay income taxes.
As a result, if you plan to mine Bitcoin or another cryptocurrency as a hobby, you’ll have to recognize the Fair Market Value (in USD) as hobby income when you receive the coins from mining.
If you’re mining as a business, you’ll recognize the coins from mining at the time of your receipt. Of course, the amount of taxes you need to pay and the filing obligations for a business may differ from an individual doing Bitcoin mining. More on crypto mining tax reporting later in this article.
Can I deduct Bitcoin mining equipment on crypto taxes?
Starting a mining operation as a hobby and not a business can be a costly endeavor. Modern mining rigs are expensive, and you need a lot of power (electricity) to generate enough income to cover your ongoing costs.
You can deduct your upfront costs such as mining rigs and similar equipment, reducing your tax bill in the end if you are mining as a business. No such deduction is allowed if you are mining as a hobby because, under the current tax law, hobby expenses are no longer tax-deductible.
Can I tax-deduct recurring costs like electricity?
If you’re mining as a business and earning income from it, you can deduct your ongoing costs (e.g., repairs/maintenance for the mining machines, electricity bills), lowering your tax obligations. No such deduction is allowed if you are mining as a hobby.
How to report Bitcoin mining income on your crypto taxes?
There are crypto tax reporting obligations you need to be aware of when mining cryptocurrencies. When you receive any crypto from mining, you need to record it as income by using its FMV in USD at the time of your receipt.
When you file your tax return for the year, you will need to report the aggregate value in USD for all the coins you mined during the year. If you are mining as a hobby, you need to report hobby income. If you are mining as a business, you need to report business income on Schedule C if you are operating as a sole proprietor or single-member LLC.
Am I taxed from other crypto operations after receiving mined coins?
After you recognize income from mining coins, if you incur other transactions with the crypto you mined, you may need to recognize a taxable event.
For example, if you swap the crypto you mined for USD one year later at a profit, you’ll need to calculate the capital gains in that trade, report it, and pay capital gains taxes. Your cost basis equals the amount of income you recognize when you receive the crypto you mined.
In the US, all crypto to crypto and crypto to FIAT trades are taxable events. Those gains will lead you to pay a capital gain tax rate, which will depend on the holding period between the time you received the mining coins until the time you sell them.
If you held the mining coins for more than 12 months, you would benefit from a long-term capital gain tax rate, ranging from 0% to 20%, depending on other factors (e.g., filing status). If you held the mining coins for 12 months or less, you would be subject to short-term capital gains tax rate, ranging from 10% to 37%. Learn more about the advantages of long-term holding in crypto.
If you use the mined coins to trade for another crypto or FIAT, you’ll need to report them on Form 8949 and Schedule D of your Form 1040 after determining the gain/loss on each trade.
A crypto mining tax simulation: Sophies earns Bitcoin from mining
1. Sophie starts Bitcoin mining
In May 2021, Sophie started to mine Bitcoin. She bought equipment (mining rigs) for $10K. She also spent $300 in electricity costs per month, on average. Remember, these costs won’t be tax-deductible if she is not mining as a business but only as a hobby
2. She receives the first coins from mining
In June 2021, Sophie received her first coins from mining. She needs to recognize the Fair Market Value (FMV) of the coins she received from mining as income. At that time, she received 0.05 BTC when 1 BTC is worth $30,000.
As a result, she needs to recognize $1,500 (0.05*$30K) as income. Sophie will need to report this on her income tax return, including all the future income she will earn from mining in the following months.
3. Sophie later sells her mining coins for USD
Bitcoin reached an all-time high in December 2021 at $70,000, and Sophie wanted to sell that first 0.05 she received in June for USD ($3,500). Since she held her BTC for less than 12 months, she’ll incur a short-term capital gain. For simplicity purposes, let’s assume the tax rate* will be 35%. She’ll have to report a capital gain of $2,000 ($3,500-$1,500). Assuming a 35% tax rate for this trade, Sophie will need to pay $700 in capital gains tax in 2022 when she files her 2021 tax return.
Many trading operations are taxable events in the US as an individual. To clarify any doubt ou may have, check our ultimate guide for crypto taxes in 2021.
*Your final tax rate will depend on your personal situation (e.g., filing status) and other factors. This rate is used for simulation purposes only.
How is Bitcoin mining taxed in the UK?
In the UK, the HMRC updated its crypto tax guide and provides clear instruction on the taxation of crypto mining. If you earn coins from crypto mining, you’ll have a taxable event, subject to income taxes.
According to the HMRC guide, you have to access “the pound sterling value (at the time of receipt) of any tokens awarded,” taxed as “income (miscellaneous income).”
*This post is part of the Crypto Taxes AMA series. Follow our weekly AMAs on Twitter where our expert CPA, Sharon Yip answers your crypto tax questions.
Learn how to enter your Bitcoin mining income into CoinTracking:
CoinTracking can help you with much more than crypto mining:
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Automatic Capital Gains, according to12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB).
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If you need personalized help reviewing your trades or preparing your US tax returns, check out our CoinTracking Full Service. A team of crypto tax experts led by Sharon Yip, who helped us with this article, provides assistance for CT Full Service.
Clarify all your crypto tax questions with our weekly guides:
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2021’s NFT guide (with taxes).
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Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.