How is crypto mining taxed?

pic to accompany blog post about how crypto mining taxes are calculatedIn the United States, cryptocurrency is subject to at least two types of taxation: income and capital gains taxes. Today, let’s take a look at some IRS and tax filing issues that specifically affect miners and cryptocurrency owners.

Crypto Mining Tax Considerations

Cryptocurrency tokens are created via the mining process. When U.S. citizens acquire cryptocurrency units via mining, the IRS views it as a profit-bearing event subject to income and self-employment tax. Reporting values correspond to the token’s market value at the time of mining.

Miners, however, can deduct operational costs, like electricity, specialized hardware, and rent. To determine what you can and cannot write off, connect with a crypto tax lawyer.

Crypto Mining Tax: Capital Gains

Unless miners hold cryptocurrencies indefinitely, any gain, whether from a fiat or digital transaction, is a taxable event. And since the IRS treats bitcoin as property, sales involving cryptocurrencies are subject to capital gains tax.

When maneuvering through the tax maze, miners have several cost-saving cards at their disposal. Miners can often avoid additional capital gains or losses if they swap tokens for fiat currency immediately upon receipt. Why? Because in such cases, the cryptocurrency’s value doesn’t change much, if at all. Another way limit property tax on acquired coins is gifting. A self-directed IRA also works.

Crypto Mining Tax: Fluctuating Value

Cryptocurrency’s market volatility creates another level of tax complexity. As Coindesk succinctly stated:  “A bad day in the cryptocurrency market can mean the difference between profit and loss, so talented coin miners must be both competent technicians and skilled investors.”

Forks are another tricky, crypto-related tax issue. The American Bar Association’s Section of Taxation sent a letter to the IRS recommending a zero value for new coins at the time of a “fork.”  Despite the ABA’s request, most practitioners take a conservative position and treat forked coins as income (like mined coins).

Not only are cryptocurrencies’ spot values on a rollercoaster, but determinative accounting methods are also in flux. For example, when calculating the “costs of goods sold,” companies are able to choose “last in, first out,” or “first in, first out” to establish a dated inventory manifest with corresponding market values. However, in the case of crypto, most analysts, accountants, and attorneys believe that FIFO is the only option unless an “adequate identification” can be made.  To date, the IRS has not expressed any guidance on this issue.

We’ll Help Sort Your Crypto Mining Taxes

What are the ramifications of not reporting your mining income or capital gain? Audits, penalties, or even worse.  Contact us for a consultation today. We’ll make sure you pay the least amount possible by leveraging all available deductions, credits, offshore, and gifting opportunities.

Connect With A Cryptocurrency Tax Lawyer »