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michael-odell
New Member

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

I made a pretty sizable return from trading crypto currencies, but I also invested a pretty large sum to get that return.  Is it more beneficial to log this as self-employment or investment income?
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Accepted Solutions
TomYoung
Level 13

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

How you report your activity isn't optional.

If you're mining crypto currencies then each time you mine a new coin (or fraction thereof) you translate that currency to US Dollars at the appropriate spot rate.  That becomes that coin's basis and the sum of your mining activity is reported as revenue on Schedule C, from which you deduct your associated costs.

Each time you convert a crypto currency to a different crypto currency (or to US Dollars) you have a reportable sale, long term or short term as the case may be.  The basis for the coin is what you paid for it or, if you mined it, the spot rate you used to report the revenue.  This activity gets reported using the "Stocks, Mutual Funds, Bonds, Other" interview, telling TT that no 1099-B was received.

Tom Young

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10 Replies
TomYoung
Level 13

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

How you report your activity isn't optional.

If you're mining crypto currencies then each time you mine a new coin (or fraction thereof) you translate that currency to US Dollars at the appropriate spot rate.  That becomes that coin's basis and the sum of your mining activity is reported as revenue on Schedule C, from which you deduct your associated costs.

Each time you convert a crypto currency to a different crypto currency (or to US Dollars) you have a reportable sale, long term or short term as the case may be.  The basis for the coin is what you paid for it or, if you mined it, the spot rate you used to report the revenue.  This activity gets reported using the "Stocks, Mutual Funds, Bonds, Other" interview, telling TT that no 1099-B was received.

Tom Young

View solution in original post

amahdy20
New Member

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

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.

<a rel="nofollow" target="_blank" href="https://www.irs.gov/businesses/small-businesses-self-employed/passive-activity-losses-real-estate-ta...>

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.
maglib
Level 10

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

You can also choose to report Mining as hobby income if you do not meet the rules to be a business and only mine as a hobby although then expenses are not deductible other than as itemized deductions and then limited to 2% of AGI.  <a rel="nofollow" target="_blank" href="https://www.1040.com/tax-guide/taxes-for-the-self-employed/hobby-or-business/">https://www.1040.com/...>
fanfare
Level 15

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

you are materially participating by turning on the computer, keeping the electricity going, and recording the results to your own accounts.
maglib
Level 10

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

According to the IRS, a trade or business is considered a passive activity unless the taxpayer materially participates. You can claim to have materially participated in the operation of a trade or business activity by meeting one of seven following tests:
1You participated in the activity for more than 500 hours.
2Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
3You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
4The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities , under Recharacterization of Passive Income, later.
5You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
6The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
7Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
You didn’t materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity doesn’t count in determining whether you materially participated under this test if:

Any person other than you received compensation for managing the activity, or
Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services).
marineuac
New Member

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

So mining does not need to be reported quarterly ?
maglib
Level 10

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

mining needs to be reported on your annual tax return and if you owe quarterly estimated taxes, they must be paid.
marineuac
New Member

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

how do i know if i owe quarterly estimated taxes?
fanfare
Level 15

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

This is sort of off topic.
maglib
Level 10

Is it better to treat gains and expenses from the trading and mining of crypto currencies (Bitcoin, Ether, Lite Coin, Ripple) as investment income or self employment?

you need to go through the interview.  Did you owe a penalty for underpayment this year?
The IRS requires you to make estimated tax payments during the current tax year if both situations listed below apply:

You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
You expect your withholding and refundable credits to be less than the smaller of:
90% of the tax to be shown on your current year's tax return, or
100% of the tax shown on your prior year's tax return. (Your prior year tax return must cover all 12 months.)
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