So you bought a couple of 3060 TI’s this past month to mine Ethereum (or other cryptocurrencies) and wanted to start your own money printing press when you mine your own Ethereum and sell it for the good old American Dollar. One thing you have to consider is the tax implications of mining and sales.
The IRS has recently launched Operation “Hidden Treasure” to root out tax evasion from cryptocurrency miners. Tax Evasion is illegal and you can go to jail for it.
When you first start crypto mining – one of the first questions is that whether it is considered a hobby or a legitimate business? There are certain criterion to determine whether it is a hobby or a legitimate business.
Criterion for determining if it is a business
Generally if it looks like a business, smells like a business, and acts like a business, it is a business and not a hobby. The IRS considers 9 different qualitative factors in determining if your activities are a business. There is no one factor that is decisive:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether you have personal motives in carrying on the activity.
- 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 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.
A hobby activity is an activity not done for profit. Generally if you are only mining with your gaming GPU or 2 GPUs it would be considered a hobby and not a business.
Tax Implications as a Hobby
The mining income would be reported under other income as all income unless otherwise excluded by IRS Code is considered taxable income. You would value your income based on the payout time when the crypto is transferred to your crypto wallet.
Unfortunately the expenses (the purchases of the cards itself, electricity, and other costs) are not deductible since the Tax Cut and Jobs Act of 2017 was passed.
All income is taxable, and you cannot expense anything.
Not a good idea for Crypto miners to be treated as a hobby by the IRS.
To form an LLC or not? That is the question.
For tax purposes, a single member LLC is treated like a sole proprietorship on the tax return, which appears as a Schedule C on your annual tax return, unless you have elected to be tax under subchapter S by filing a separate tax form. If you elect subchapter S you would need to file an 1120S – S-Corp Tax return which is much more complex than this guide would be discussing.
So in another words, an LLC is just a legal liability protection. There are no tax implications with an LLC. You would have to pay a filing fee to the state and dependent on state you may have a renewal fee for the LLC until it is closed.
Tax Implications as a Business
The IRS considers the mining to be in a business if you can show in at least 3 out of the 5 years a net income on your Schedule C on the tax return, or at least show promise of a profit in the future if you cannot show profit 3 out of the 5 years.
The mining income would be reported as income on the Schedule C on the tax return. You would value your income based on the payout time when the crypto is transferred to your crypto wallet.
Sale of Crypto is not included here.
Expenses for the business can include for example but not limited to electricity, rent, supplies, depreciation, home office and internet costs.
Use common sense on what you can deduct. Obviously if you are mining from home don’t deduct the entire electric bill on the tax return.
The cards and computers you purchase are considered fixed assets and subject to be depreciated (expensed equally) over a 5 year period. However you can elect Section 179 deduction which means up to $1 million in fixed assets per year can be 100% depreciated when purchased. So your cards and computers can be expensed immediately (unless you purchase more than $1 million in assets).
After subtracting the expenses from the income you have your net profit or loss. This is subject to both ordinary income tax and also self employment tax (15.3% for Social Security and Medicare). Half of the self employment tax can be deducted against ordinary income on your income tax return. Additionally 20% of the profit can be deducted on the tax return.
Note that if you have a loss from the business you can offset other earnings you have made on the tax return and there is no self employment tax for the year.
Sale of Crypto
Okay, you’ve decided that you mined some crypto and want to cash out to USD and make some profit.
Treat the sale of Crypto like the sale of stock. You would find the sales price and subtract the mining price to calculate your gain or loss. If you aren’t liquidating everything from your wallet then you want use the First In First Out method (FIFO) to calculate the basis (mining price) of the crypto itself. So basically the oldest batch of crypto that you have mined is sold first and then the second oldest batch of crypto is sold next and so forth until it reaches the amount of crypto you have sold.
Crypto that is held less than a year is sold as ordinary income. Crypto held for more than a year before selling is sold as capital gains, which is either taxed at 0%, 15%, or 20% based on your other income.
Depending on the volume and amount of transactions you may be issued a 1099-B form from the selling site. You would need to report that on your tax return. If they don’t issue a 1099-B or other form then you would need to self report it.
Tax disclosure
The IRS will ask if you have either owned or traded crypto currency on its tax return. It is better to click yes than no if you have mined or owned crypto during the tax year.
Check out our beginners mining guide by clicking here!
This article was written by “Golden Domer” on the ATR Stonks Discord, and does not represent the views of NerdSpeak.net, or NerdSpeak LLC, and should only be used for informational guidelines. Please consult your tax CPA before engaging in any transaction.
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