Cryptocurrency Mining Tax Impact: Explained

Cryptocurrency Taxes – Quick Overview

Cryptocurrency is subject to taxation just like fiat currency. But there are standards. Let’s take a look at representative cryptocurrency taxes.

• When you make money by selling your cryptocurrency, you have to pay out any capital gains you realize while selling it.
• If you receive payment in cryptocurrency for the goods or services you provide, you will have to pay taxes on that amount, just like you would with business income.
• If you are involved in cryptocurrency mining, you will need to pay taxes on your mining rewards.
• Again, if you pay with cryptocurrency to buy something, you will have to pay taxes on the increased value of the cryptocurrency compared to what you purchased.

Cryptocurrency mining rewards taxation

Now, if you are a successful cryptocurrency miner receiving mining rewards, you are subject to two tax brackets.

~ Pay income tax on mining rewards.
~ Pay taxes on capital gains earned from selling mining rewards.

Let’s take a closer look.

• Income tax on mining rewards

Any income earned through cryptocurrency mining is taxable like ordinary income. Cryptocurrency mining income is taxed based on the value of the cryptocurrency at the time of receipt. For example, if you offer a mining reward of 0.50 BTC, you will have to pay income tax based on the Bitcoin price in USD on that date. Tax rates on mining income vary from person to person depending on income level.

• Tax on Capital Gains/Loss

Let’s say you hold cryptocurrencies such as Bitcoin or Dogecoin and at some point you want to sell them for a profit or for your own needs. Capital gains, which are profits from selling cryptocurrency, are also taxable income. You will pay taxes on your earnings in US dollars.

On the other hand, if the price of a cryptocurrency falls and you sell that cryptocurrency, you will pay taxes on the capital loss.

Cryptocurrency Mining Tax Deduction

Cryptocurrency mining is an expensive business. However, if you run your mining operation as a business, you can claim a cryptocurrency mining tax deduction. If you mine as a hobby, you are not eligible for a cryptocurrency mining tax deduction. Here’s how to claim your tax deduction:

1. Electricity charges

Cryptocurrency mining is an energy-intensive process. Most miners use specialized mining devices such as ASICs with high computational power to mine cryptocurrencies, which incurs significant electricity bills. Miners can show those costs for tax deduction purposes.

If you run a home mining business, it is a good idea to have separate electricity meters for business and personal use. So you can file the appropriate electricity bills and deduct those costs from your taxes.

2. Equipment cost

Miners often purchase advanced mining hardware, such as ASICs, to efficiently mine their intended cryptocurrency. These ASICs are designed specifically for specific cryptocurrency mining algorithms and therefore cost a considerable amount of money.

Miners can mark up their ASIC costs and deduct those costs from their taxes. It is always better to maintain separate files for all equipment and mining business related bills. Therefore, you can conveniently use it when reporting taxes.

3. Repair costs

Repairs and maintenance are common for any equipment in the long run. With regular use, ASICs are also easy to repair. You can collect repair and service bills and submit them when claiming tax deductions.

4. Leased mining space

If you rent space for your cryptocurrency mining business, you can mark this as a business expense and claim a tax deduction. All you need to do is maintain the proper rental documentation. If you are using part of your home for a cryptocurrency mining business, you can also prove this with the proper documentation.

Failure to pay cryptocurrency mining tax

It is illegal to fail to report cryptocurrency mining income or capital gains from mining rewards or cryptocurrency sales. The IRS may impose fines on cryptocurrency tax evaders. In fact, miners may have to go to prison under unfavorable conditions if found guilty. Therefore, it is always recommended that you consult a professional tax consultant if you have any questions regarding cryptocurrency mining taxes.