Hello Tom, I understand that the IRS has hinted that "(If ) a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment resulting from those activities constitute self-employment income and are subject to the self-employment tax"
That is the only reference I could find any IRS guidance to accounting for virtual currency mining income.
However, the key phrase is "if it constituted a trade or business". I would argue that is not the case for most mining operations. For example, I am not in the business of mining in order to have inventory to sell to clients on regular bases. Instead, I would be setting up a mining farm (or renting cloud hash power) with the purpose of accumulating investment assets for the long-term value appreciation. Revenue is not accounted for as a result of a sale to a customer, instead, income is immediately realized once coin s are mined. There is hardly any aspect of self-employment applicable and it would make much more sense to treat mining as income from passive activities.
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Passive Activities includes
Income and losses from "Sole proprietorship or farm in which the taxpayer does not materially participate"
A miner builds the mining farm once, and just monitor/maintains occasionally.
It also makes much more sense to account for mining expenses as a passive income activity's expenses. As described in publication 550 "Expenses of Producing Income:
You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). To be deductible, these expenses must be ordinary and necessary expenses paid or incurred:
To produce or collect income, or
To manage property held for producing income.
The expenses must be directly related to the income or income-producing property, and the income must be taxable to you.
One time purchase of mining hardware and expenses are directly/ solely related to the generation of revenue (the mined virtual asset), thus it is an investment income vs self-employment in my opinion.
