If you’re filing taxes as a crypto-miner in the US, you need to be aware of the IRS guidelines on mining income.
IRS Views Mining Rewards as Income
The Internal Revenue Service (IRS) first published its guidance on taxing cryptocurrencies in 2019 and clarified how mining should be reported for taxes. The IRS views mining profits as income for tax purposes, and as with any income, crypto miners are required to pay taxes.
Cryptocurrency miners would do well to pay attention to the tax implications of their operations, as failure to comply could result in action from the IRS.
A key point to note is that mining rewards are taxable at their receipt, not when sold. Every time a crypto-miner receives coins in their wallet, the market price is used as a cost basis for reportin gross income. Miners will report gross income on Form 1040, the official form for filing individual income tax returns in the U.S.
“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,” stated the IRS.
According to crypto tax software TaxBit, commercial miners account for most mined cryptocurrencies in the U.S.
Commercial Miners vs. Part-Time Miners
Those engaging in mining activities on a business scale will need to report their income and expenses on Schedule C (Form 1040). The mining business will be allowed to claim a deduction.
According to the IRS, miners can deduct expenses such as hardware, equipment, electricity, internet, and other business costs against mining income.
Then there are miners whose primary income does not rely on mining cryptocurrencies. Such ‘non-business’ mining income will have to be reported as additional income by taxpayers on Schedule 1 (Form 1040). Non-commercial miners cannot deduct expenses when paying taxes.
Mining Taxes and Capital Gains
If miners liquidate their newly earned coins/ tokens right away, their profits are not subject to capital gains tax. But if they sell their crypto for a profit, a capital gains tax needs to be considered as well as income tax.
While crpyto mining profits are classed as income, the IRS treats cryptocurrencies themselves as property. Therefore every time you sell them for cash or exchange them for other cryptocurrencies, it can generates a capital tax event.
To calculate and report capital gains and losses on the sale of cryptocurrencies, taxpayers will need to file IRS Form 8949, and the subtotals carry over to Schedule D (Form 1040). Each sale mined cryptocurrency has to be reported on the tax form for determining the correct capital gains and capital losses.
Record All Transactions
Considering all of the above factors, calculating the final taxes can be a daunting task. Miners can use tax software like TaxBit to calculate what they owe when tax season comes.
To be able to calculate taxes, solid record-keeping is a good practice. Miners should properly record transactional data including the time, market price, and amount of cryptocurrency sold. This practice is also essential when it comes to file taxes accurately to claim deductions.
Disclosure: The author did not hold crypto mentioned in this article at the time of press.
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