What To Know About Bitcoin Mining And Taxes

What To Know About Bitcoin Mining And Taxes

Two tax professionals share their opinions and insights on many questions facing cryptocurrency miners.


Tax questions are some of the most important considerations facing anyone in the cryptocurrency industry, especially miners. Some issues are clearly defined but many things are not as easily understood. Two tax professionals join the Compass livestream to discuss many tax questions from the audience and share their experience in the world of crypto taxes.

This livestream is essential for all miners since having a clear understanding of mining taxes is imperative for anyone that mines bitcoin or other proof-of-work cryptocurrencies.

Show Notes

Introductions (timestamp)

  • Roger Brown: former IRS tax attorney, worked as an international tax lawyer for 30 years; spent a decade at the IRS, got into crypto in 2016.
  • Shehan Chandrasekera: head of tax strategy at CoinTracker, a tax software tool; has been an accountant throughout his whole career, got into crypto in 2017.

The basics of bitcoin mining taxes (timestamp)

  • There are no specific rules in tax code for cryptocurrency, no mentions of cryptocurrency
  • The mining rewards generated by an ASIC count as ordinary income
  • The reward’s fair market value must be recorded at time received
  • If a miner sells the asset, a capital gain or capital loss is triggered
  • Miners must account for self-employment taxes
  • Direct miners may be classified as a trader business
  • Smaller miners are classified as Hobbyists (no self-employment taxes)
  • If mining with a centralized company where the company conducts all mining activities: this is passive income and not classified as a trader business and no self-employment taxes are owed

How does IRS put out guidance on tax law? (timestamp)

  • IRS tax law is based on:
  • Tax code enacted by congress
  • Tax code references to commodities, stock, and other property
  • Previous court cases
  • IRS private rulings
  • General statements/FAQs
  • Revenue rulings
  • Definitive guidance will emerge as the crypto market matures and amount of cryptocurrency increases

Considerations for filing taxes as a miner and common mistakes (timestamp)

  • Income recognition events, convert to market value at time of receipt
  • Most small scale miners are classified as hobbyists, rewards earned must be reported as ordinary income and don’t qualify for deductions
  • Professional miners can deduct office expenses, electricity costs, equipment costs, etc. and are taxed on net income
  • Common mistake: not allocating cash to pay taxes in real time or underestimating taxes owed
  • Professional miners will have to make quarterly estimates of self-employment taxes
  • If mining in multiple countries, local tax laws must be considered

Does the location of the mining pool, machine, hosting facility, and provider impact how taxes are paid? (timestamp)

  • In United States, miners pay taxes on worldwide income
  • Small scale miners should use local facilities to simplify their tax burden
  • Large scale miner with operations across the world should hire a professional
  • PoW mining is a service from a tax perspective
  • Miners should check the tax laws of each country that touches their operations

Mining opportunity zones (timestamp)

  • If a miner realizes capital gains from crypto investments, they can invest those gains in an opportunity zone fund within a 180 day window
  • Benefits:
  • No current tax on capital gains
  • Tax deferment if held for 5 years in the fund
  • 10% forgiveness on current tax bill
  • No tax on sale of investments held in the opportunity zone fund
  • Mining operations can qualify for this
  • Opportunity zone rules differ among tokens

Are miners exposed to double taxation? (timestamp)

  • If you mine bitcoin and then immediately sell: you have one level of taxation: your gain is zero bc the basis is the amount realized from selling it
  • Double taxation is a misconception, there is a difference between double taxation and triggering taxable events
  • Example: If $300 worth of bitcoin is mined, it must be reported as ordinary income (tax owed on the $300). Then it is sold for $1000, you only pay tax on the $700 gain
  • $1 of income is not taxed twice but taxable events are created at two different points in time

Should miners create an LLC? (timestamp)

  • LLC status helps a miner argue that they are not a hobbyist
  • Benefits of LLC status:
  1. Qualification for deductions
  2. Taxation on net income not gross income
  3. Legal protect against claims
  • Disadvantages: Annual fees, extra paperwork, and reporting requirements
  • Trader business deduction: 199 café deduction; allows miners to qualify for an additional 20% deduction

How do you treat mining hardware depreciation? (timestamp)

  • Depreciation only allowed for trader business classification not hobbyists
  • Safe harbor rule allows miners to expense anything below $2500
  • Section 179 can be used for depreciation in the first year or miners can depreciate equipment over a 5 year period

Do any fees qualify for deductions? (timestamp)

  • Pool fees, hosting fees, and electric fees are all deductible
  • Accounting for these fees can structured as an adjustment to gross income vs a standard deduction

How should miners treat machine sales? (timestamp)

  • This is a taxable event because the miner is disposing of property (cryptocurrency)
  • Machine sales can trigger gains from price appreciation and/or depreciation recapture
  • Profit = Sales price – adjusted basis of your equipment

Does bitcoin as legal tender (e.g., El Salvador) affect miners paying taxes? (timestamp)

  • It does not change anything with respect to U.S. tax laws
  • For bitcoin to qualify as a currency (under the law), the following must also be considered in addition to being labeled as legal tender : Is it backed by or issued by a foreign sovereign?

Updates to infrastructure bill that miners should consider? (timestamp)

  • No concerns, miners are not classified as brokers
  • The bill should not worry companies launching mining-related products or services.