Question about mining zcash or other coins. When mined and sold right away how do you calculate tax. I don’t want to hold coins for massive profit just sell when mined.

[zcash321]

I can’t get a straight answer. I know if you hold coins for a profit you need to declare. But if I mine a coin on a day it’s $200 and sell for USD $200 how much tax is taken from me. I don’t want to hold I would transfer straight to bank to pay rent etc.

[Critter]

You should still report the sale however if you buy & sell for the same price you will no profit or loss so aside from wasting your time it will not effect your return either way.

[zcash321]

Sorry if I misled you. I wouldn’t be buying the coins I would be mining them. I would of course be paying for the electricity and the mining rig. I know there’s a profit here if I don’t need to tax it. I don’t know how much I would make in total if I do need to include tax.

[Opus 17]

Your cost is the cost to produce them. Since that is going to be very difficult to prove to the IRS satisfaction, you should probably assume that your taxable profit is the entire sales price or net value when your mined them.

 The problem of calculating cost is how do you allocate the cost of electricity for computing resources if you don't have a separate electric meter? How do you prove to the IRS satisfaction that the amount of electricity you say you spent to produce the coins is correct? You generally won't be able to deduct the expense of your computer or Internet connection unless you have a dedicated computer and dedicated Internet connection just for the purpose of mining cryptocurrency.  Then, you would have to file a schedule C and report this as earned income, like a self employment job or independent contractor.   Then it would be easier to deduct your supplies and a dedicated mining computer, but it would also subject you to self-employment tax on the net profit of your business.  If you simply report this as other income, and don't try to deduct your expenses, then it is taxed as short-term capital gains which is equal to the ordinary income tax rate, but does not subject you to additional self-employment tax. 

[zcash321]

Thank you, I’m not looking to get taxed back for my rigs. I’ll pay for that and electricity. I just want to make sure I’m not getting screwed over by the IRS. I’ll probably install a separate electric meter I know it will help I’m already planning on having a few power sources installed so I’ll just add this too. I’d rather do what’s cheaper in taxes which won’t be self employment just short term capitle gains?

So basically it cost $20 to make a $200 coin I would just pay tax which would be $20 per coin? I’m sorry I’m new to the world of taxes.

[Critter]

No ... taxes are paid on the profit ... cost $20 ... sold $200 = profit of $180 and if you want to deduct the cost you will also pay SE taxes on the profit as well as federal & state taxes.

If you don't call it a business on a Sch C and instead call it an investment then you only pay federal & state taxes on the profit without the cost deduction.

[zcash321]

Thanks, I guess there’s no point in mining then it seems like waste.

[Opus 17]

That's up to you.  If you call it a schedule C business, then you pay $20 to mine a $200 coin.  That gives you $200 of gross income, $180 of profit.  You pay self employment tax of 15% ($27) and you pay income tax of between 10% and 33% depending on your other income.  Let's say 25% for most middle class taxpayers -- single earning $40K per year or more -- so that's another $45.  At the end of the day you cleared $108 from your $200 coin.  (And you'll owe some state tax depending on your state.)

Now, this is the same position as a painter or photographer or other artist or craftsperson.  You pay $20 for materials, sell the work for $200, and net $108 or so after taxes and expenses.  You have to decide whether making an after-tax profit of $108 per coin is worth the trouble.

If you don't report it as a business but just as a short term investment (bought for $0, sold for $200) then you can't deduct your mining expenses, but you don't pay self employment tax.  So you pay a straight 25% on the $200 profit ($50).  After subtracting your $20 cost, you net $130 per coin.  

(If your expenses were higher, you might pay less tax as a business, but if your expenses are 10% of your selling price, you pay less tax using the investment rules.)

Everyone in business looks at their taxes and makes the same calculation, is it worth it?

[zcash321]

Thanks for all the information it helps a lot.

[harleyguy4life]

if you know how much wattage your computer consumes at full load while mining you can calculate it that way.