In the case of some activities, the taxpayer must identify whether they are a hobby or (self-employed) business miner, staker etc. for tax reporting purposes.
In general, this is relevant for the following activities:
- Income from Mining
- Income from Staking
- Income from Masternodes
- Income from Lending
- Income from Bounty Programs
The IRS states a hobby activity is done mainly for recreation or pleasure. The IRS uses the following criteria to determine whether a taxpayer’s profitable activity is deemed a hobby or a trade or business. Please note one factor alone is decisive and all factors must be considered:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
If the taxpayer is doing the activity as a hobby, based on the criteria listed above, the income received by the taxpayer as it relates to virtual currency based on the activity will be treated as ordinary income.
If the taxpayer is deemed to be engaged in a trade or business for which virtual currency activities generate trade or business income and owns/leases their own (business) equipment, the taxpayer must report any income or rewards received as self-employment income.
Depending on whether the activity is deemed business or a hobby, please classify with the switcher shown above.