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Crypto mining is taxed twice: once when you receive the coins and again when you sell them. If you are dealing with crypto mining tax irs, this double taxation catches many miners off guard.
Mining Income Is Ordinary Income
Every time you receive mining rewards, the fair market value of those coins at the time of receipt is ordinary income. If you mine as a business, it is also subject to self-employment tax of 15.3%. This applies whether you mine Bitcoin, Ethereum (pre-merge), or any other cryptocurrency. The income is taxable when received, regardless of whether you sell the coins.
Hobby vs. Business Mining
The IRS distinguishes between hobby mining and business mining. Business miners can deduct expenses including electricity, equipment, facility costs, and depreciation. Hobby miners cannot deduct expenses against mining income under current law. The determination depends on factors like profit motive, time spent, and scale of operations.
Equipment Deductions
Business miners can deduct or depreciate mining equipment. Section 179 allows immediate deduction of equipment costs in the year of purchase. MACRS depreciation spreads the deduction over the asset useful life. Electricity costs are deductible as a business expense. These deductions can significantly reduce taxable mining income.
When Mining Creates Tax Problems
Many miners accumulated coins over years without reporting income. When they finally sell, they face both unreported mining income and capital gains tax on the sale. The combined liability can be substantial. If you have years of unreported mining income, voluntary disclosure and resolution through an OIC or installment agreement is usually the best approach.