Author: Bernarda Sari
The interest in cryptocurrency mining has grown tremendously in the last few years. It’s crucial to understand your tax reporting obligation when you deal with cryptocurrency, including mining it. Cryptocurrency mining refers to solving cryptographic hash functions to validate and add cryptocurrency transactions to a blockchain. The taxpayer (miner) receives cryptocurrency as a reward.
If you earn cryptocurrency by mining it, it's considered taxable income. It might be reported on Form 1099-NEC or Form 1099-MIS at the cryptocurrency’s fair market value on the day you receive it. The information from these forms can help you prepare Schedule C, Profit and Loss from Business, and Schedule SE. Self-employment Tax. You need to report this even if you don't receive a 1099 form, as the IRS considers this taxable income and is likely subject to self-employment tax and income tax.
Recordkeeping is essential if you’re selling or trading rewards. The assets must be recorded at the Fair Market Value (FMV) when you receive, trade, and sell them. Income received from mining is taxed as ordinary income based on the FMV of your coins on the day you received them. The tax rate depends on your income level, and it can go from 10% to 37%.
Hobby vs. business
If you mine cryptocurrency as a hobby, you will include the value of the coins earned as "Other Income" on Form 1040 Schedule 1. However, you are not allowed any deductions.
In contrast, you will report your income on Schedule C if you run your mining operation as a business. In this case, you can fully deduct the expenses associated with the business. To illustrate, you can deduct the cost of the mining equipment through section 179, a percentage of your electricity expenses, repairs to your mining equipment & rented space, among others.
We recommend maintaining quality records of your expenses in case of an audit.
Navigating crypto mining reporting and the taxation ins and outs requires in-depth knowledge of the tax code and cryptocurrency. You could spend hours figuring out what you owe or leave the work to our crypto tax pros.
Do you need help reducing your crypto mining taxes? Contact a Reynolds + Rowella tax advisor if you have questions.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
