Crypto Mining Tax Implications: Explained

Cryptocurrency Taxes – A Quick Overview

Cryptocurrency is taxable, just like fiat currencies. However, it has its norms. Let’s look at the prominent cryptocurrency taxes.

• When you sell cryptocurrency and make profits, you should pay capital gains you realized on selling it.
• When you get paid in cryptocurrency for the goods or services you offer, you owe tax for that amount as you do with any business income.
• If you’re into crypto mining, you must pay tax for the mining rewards you earn.
• Again, when you pay in cryptocurrency to buy something, you owe tax on the increased value of the crypto compared to what you purchased.

Cryptomining Rewards Taxation

Now, if you’re a successful crypto miner earning mining rewards, you are subject to two tax brackets.

~ You pay income tax for your mining rewards.
~ You pay tax for the capital gains you make by selling your mining rewards.

Let’s see them in detail.

• Income Tax on Mining Rewards

Any income you make by mining cryptocurrencies is taxable, just like regular income. You pay tax on crypto mining income based on the cryptocurrency’s value at the time of receipt. For instance, if you make mining rewards of 0.50 BTC, you should pay income tax based on the Bitcoin price in USD on that particular date. The tax rate for mining income varies from one person to another based on their income level.

• Tax on Capital Gains/Losses

Let’s assume that you hold cryptocurrencies like Bitcoin or Dogecoin and want to sell them at some point to make profits or for your own needs. The capital gain, which is the profit you make by selling your cryptocurrencies, is also a taxable income. You will pay taxes on your earnings in US dollars.

On the other hand, if you sell the cryptocurrencies since their prices fell, you will pay taxes for the capital losses.

Cryptomining Tax Deductions

Cryptomining is an expensive business. However, if you’re running mining operations as a business, you can claim cryptomining tax deductions. If you’re a hobby miner, you are not eligible for cryptomining tax deductions. Here is how you can claim tax deductions.

1. Electricity Charges

Cryptomining is an energy-intensive process. Most miners use specialized mining devices like ASICs with high computational power to mine cryptocurrencies, which will cost them significant electricity bills. Miners can show those expenses for tax deductions.

If you are running a home mining business, it is highly recommended that you have a separate electricity meter for your business and personal uses. Thus, you can submit appropriate electricity bills and deduct those expenses from your taxes.

2. Equipment Costs

Miners often buy advanced mining hardware like ASICs to mine their intended cryptocurrency efficiently. These ASICs come at a significant cost as they are specifically designed for a specific cryptocurrency’s mining algorithm.

Miners can show their ASIC costs and deduct those charges from taxes. It is always better to maintain a separate file for all equipment and mining business-related bills. Thus, you can find it handy while filing taxes.

3. Repair Expenses

Repair and maintenance are common for any equipment in the long run. When used regularly, ASICs are also prone to repairs. You can collect those repair and service charge bills and submit them while filing tax deductions.

4. Rented Mining Space

If you rent a space for a cryptomining business, you can show it as business expenses and claim tax deductions. All you need to do is maintain proper rental documents. If you use a part of your house for cryptomining business, you can also show that, provided you have appropriate documentation.

Failing to Pay Cryptomining Taxes

It is illegal not to report cryptomining income or capital gains from selling your mining rewards or cryptocurrencies. The IRS may impose penalties on crypto tax evaders. In fact, miners may need to go to prison under adverse conditions if they are found guilty. Hence, it is always advisable to consult with professional tax consultants if you have any doubts regarding cryptomining taxes.