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Taxes On Mining Income

bitcoin mining

In general, all income or rewards received by a taxpayer in excess of $400 generated from the mining of cryptocurrency must be reported to the IRS. The taxpayer must also identify whether they are a hobby or (self-employed) business miner for tax reporting purposes

Hobby Miners

If the taxpayer is a hobby miner, such that they do not generate over $400 in business mining income and do not engage in mining activity as a self-employed trade or business, the income received by the taxpayer as it relates to cryptocurrency mining will be treated as ordinary income. Any losses associated with mining cryptocurrency in this situation (i.e. hobby losses), cannot be applied against the taxpayer’s ordinary income.

To report ordinary income from mining as a hobby, the taxpayer will report the amount received as income on Form 1040 Schedule 1. If the taxpayer chooses to itemize their deductions on their tax return rather than take the standard deduction, they are allowed to deduct expenses up at a maximum amount of 2% of their adjusted gross income on Schedule A.  This 2% allowance applies to all itemized expenses for the tax year incurred by the taxpayer, including those that relate to virtual mining.

Business Miners

If the taxpayer is engaged in a trade or business for which cryptocurrency mining generates trade or business income, owns/leases their own mining (business) equipment and has over $400 in business mining income, the taxpayer must report any income or rewards received as self-employment income. Expenses related to the mining business activity including but not limited to the depreciation of mining equipment, electricity, and hardware may be deducted for tax purposes. Business miners are also subject to self-employment tax at a rate of 15.3% for the 2017 and 2018 tax year.

To report business income from mining, the taxpayer will report the amount received as self-employment income and any related mining business expenses on Schedule C. The self-employment income is then translated from Schedule C to Form 1040 Schedule 1. Additionally, the self-employment tax beared by the taxpayer will be calculated and reported on Schedule SE. The self-employment tax is then translated from Schedule SE to Form 1040.

It is important to note unlike hobby mining income, net losses generated from the business mining activity may be used to offset the taxpayer’s ordinary income.

Bitcoin Mining Hardware

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