Bitcoin mining, or crypto mining, is still a very popular way for crypto enthusiasts to earn more crypto. However, if you are mining on a big scale, you’ll need to pay taxes on your crypto-mining activities. But what about miners who mine as a hobby? Do they have to pay taxes? We answer these questions in our crypto mining hobby vs. business guide. Let’s first look at what crypto mining is.
What is Crypto Mining?
Crypto mining is what makes the blockchains that host the cryptocurrency work. It’s how new tokens are minted and how transactions on the network are verified and processed. It is an important part of the entire blockchain ecosystem as it develops and maintains the distributed ledger.
Is Crypto Mining Taxable?
The answer is yes. You have to pay taxes when you mine cryptocurrency. However, there are two ways you are taxed on mining.
- It can be taxed as regular income at the time of mining
- Or as capital gains tax when you dispose of the mined tokens at a later date
It is considered a taxable event whenever earned crypto is deposited into your wallet. This means that you’ll have to pay taxes on the value at the time the crypto tokens are earned, regardless of the losses or gains made during the remaining tax year. This is why you have to keep detailed records of crypto mining.
How to Report Crypto Mining Rewards on My Taxes?
Reporting crypto mining taxes depends on two factors: whether it was earned as a hobby or as a business. Let’s get into the crypto mining hobby vs. business.
Crypto Mining as a Hobby
If cryptocurrency is mined as a hobby, it must be reported as “other income” on Form 1040 Schedule 1 on Line 8. Also, it is taxed as per your income tax bracket. Hobby mining is the simplest approach to mining taxes, and it is not eligible for business deductions.
Crypto Mining as a Business
You have to set up your mining operation as a sole proprietorship. A sole proprietorship doesn’t require legal filing, but you have to keep in mind that it doesn’t provide liability protection. Therefore, a lot of professional miners incorporate their mining business as a partnership, LLC, S Corp, or C Corp.
Based on the chosen legal structure for your mining operation, you have to report and pay crypto self-employment taxes. The earned crypto has to be reported as income on Schedule C of Form 1040 if the mining operation has been set up as a business. When your operation is set up, you can deduct certain costs as business expenses.
What Expenses Can You Deduct From Your Crypto Mining Business?
Crypto mining as a business can be a costly process, but you can write off certain expenses when you treat it as a business. Here are the expenses you could write off:
Equipment
In most cases, buying a rig may be written off in the year of its purchase according to the Section 179 depreciation deduction. This allows companies to write off the purchase of tangible business-related products instead of just letting them capitalize and depreciate.
Electricity
It is one of the biggest expenses for a mining business. Electricity used specifically for mining can be deducted as a trading expense. Ensure that you keep detailed records of your business’s electric usage. A different meter may help immensely with electricity usage.
Office Space
If you are renting space for your mining rig, it can be deducted as a rental expense. Also, if you mine at home, you are eligible for a home office deduction. According to the IRS, you can deduct a set amount of expenses based on the square footage used by your business.
Losses
The electricity and hardware expenses, along with the volatile market, can mean a loss for your business. In case you face losses, you can offset other income.
Conclusion
Crypto mining is a taxable event. However, it depends on whether the miner wants to treat it as a hobby or a business. Treating it as a hobby has a more straightforward tax approach, whereas treating it as a business is more complicated, but you can write off expenses as costs.
FAQs
1. How do I report crypto mining as a hobby?
When you mine as a hobby, you have to report it as “other income” on Form 1040 Schedule 1 on Line 8. If you have capital gains from swapping, selling, or spending your mined rewards, you must report on Form Schedule D (1040) and Form 8949.
2. Does crypto mining count as a business?
Yes, you have to set up your mining operation as a business first. Next, you have to report and pay crypto self-employment taxes.
3. Is hobby mining taxable?
Yes, hobby mining is taxable. You don’t have to pay taxes when you receive your reward. You have to pay taxes when you use the crypto rewards by swapping, selling, or spending them.