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After you file
If you have taxable income, you submit one tax return at the end of the year, that summarizes and reports all your taxable income for the year, and calculates the tax owed. Then you either pay tax or get a refund (if your payments during the year are more than what you end up owing).
There are several kinds of income, mainly divided into "earned" and "unearned." Earned income is income earned from working -- performing a service in exchange for money or other things of value. "Unearned" income is not undeserved -- it is a technical term meaning anything that does not come from what the IRS calls "work", and can include things like investment income, dividends, income from renting property, gambling and other prizes, and so on.
"Self-employed" means you are performing work or a service in exchange for something of value. Usually money, but you can also be paid in stock options or anything else of value. When you "work" and have "earned income" you are eligible for certain tax benefits that are reserved for having earned income (not available if all your income is unearned) but if you earn money from work you also have to pay medicare tax and social security tax. That's an extra 15% tax on top of your regular income tax. When you are self-employed, you report your gross income and can deduct expenses that you paid to make that money -- a maid can deduct cleaning supplies; a freelance writer can deduct paper and ink; a building contractor can deduct materials, tools, and gas for their work truck. Your net profit is subject to both income tax and self-employment tax. A self-employed tax return will include a schedule C that reports the work income and expenses and calculates the net profit.
For cryptocurrency mining, if you report it as your "work" on schedule C, you will pay both income tax and self employment tax. Your expenses (computers and electricity) are going to be difficult to prove for various reasons, so the expense deduction probably won't offset the extra tax.
So instead you would report your cryptocurrency income as "other income" -- similar to how you would report a lottery prize. The amount of income is equal to the value of each coin or part of a coin that you are awarded on the date it is awarded. For example, if you are part of a pool and are awarded 0.1 BTC once a month, you would count that as income using the exchange rate on the day it is awarded (around $1500 today). You keep a list of all the coins that are credited to your wallet, the date, and the exchange value on the day it is awarded. At the end of the year, you report the total dollar amount as income.
Separately, if you hold the currency and sell it later, you have to account for a gain or loss. This is similar to buying and selling gold coins or other collectibles. You have a capital gain if you sell for more than you paid, and you have a capital loss if you sell for less than you paid. That creates more taxable income, or a tax deduction. Suppose you create 0.1BTC on January 10 for $1500 and report that as taxable income. Then you sell it on June 30 for $1800. You have a $300 gain that is a second type of taxable income. Or if you sold it for $1200, then you have a $300 loss that you can use as a deduction later. You also need to keep accurate excellent records of each time you cash out a virtual currency, including the date and amount of the cash out and the date and amount you paid for the coin, or the date and amount of income that you reported when the coin was created.
If this is still too much for you, I suggest you find a high school, community college, or other organization that offers a free or low cost course in income taxes. The IRS has 7 years to audit you if you fail to report income and it is not clear how much information the IRS will be able to get from the cryptocurrency exchanges about their customers. You can also read the IRS web site or buy a book on the topic, there are several inexpensive books on income taxes and cryptocurrency taxes for beginners.
There are several kinds of income, mainly divided into "earned" and "unearned." Earned income is income earned from working -- performing a service in exchange for money or other things of value. "Unearned" income is not undeserved -- it is a technical term meaning anything that does not come from what the IRS calls "work", and can include things like investment income, dividends, income from renting property, gambling and other prizes, and so on.
"Self-employed" means you are performing work or a service in exchange for something of value. Usually money, but you can also be paid in stock options or anything else of value. When you "work" and have "earned income" you are eligible for certain tax benefits that are reserved for having earned income (not available if all your income is unearned) but if you earn money from work you also have to pay medicare tax and social security tax. That's an extra 15% tax on top of your regular income tax. When you are self-employed, you report your gross income and can deduct expenses that you paid to make that money -- a maid can deduct cleaning supplies; a freelance writer can deduct paper and ink; a building contractor can deduct materials, tools, and gas for their work truck. Your net profit is subject to both income tax and self-employment tax. A self-employed tax return will include a schedule C that reports the work income and expenses and calculates the net profit.
For cryptocurrency mining, if you report it as your "work" on schedule C, you will pay both income tax and self employment tax. Your expenses (computers and electricity) are going to be difficult to prove for various reasons, so the expense deduction probably won't offset the extra tax.
So instead you would report your cryptocurrency income as "other income" -- similar to how you would report a lottery prize. The amount of income is equal to the value of each coin or part of a coin that you are awarded on the date it is awarded. For example, if you are part of a pool and are awarded 0.1 BTC once a month, you would count that as income using the exchange rate on the day it is awarded (around $1500 today). You keep a list of all the coins that are credited to your wallet, the date, and the exchange value on the day it is awarded. At the end of the year, you report the total dollar amount as income.
Separately, if you hold the currency and sell it later, you have to account for a gain or loss. This is similar to buying and selling gold coins or other collectibles. You have a capital gain if you sell for more than you paid, and you have a capital loss if you sell for less than you paid. That creates more taxable income, or a tax deduction. Suppose you create 0.1BTC on January 10 for $1500 and report that as taxable income. Then you sell it on June 30 for $1800. You have a $300 gain that is a second type of taxable income. Or if you sold it for $1200, then you have a $300 loss that you can use as a deduction later. You also need to keep accurate excellent records of each time you cash out a virtual currency, including the date and amount of the cash out and the date and amount you paid for the coin, or the date and amount of income that you reported when the coin was created.
If this is still too much for you, I suggest you find a high school, community college, or other organization that offers a free or low cost course in income taxes. The IRS has 7 years to audit you if you fail to report income and it is not clear how much information the IRS will be able to get from the cryptocurrency exchanges about their customers. You can also read the IRS web site or buy a book on the topic, there are several inexpensive books on income taxes and cryptocurrency taxes for beginners.
‎June 4, 2019
7:30 PM
