Crypto Mining how to determine cost

[nbizic56]

When mining crypto as a hobby, there is a cost to electricity and a cost for the equipment used for mining, but there is no actual "purchase" cost since the mining generates the reward.  How do you determine a cost basis when you eventually sell the crypto you have mined?   

Example:  I used $5 in electricity plus the cost of equipment to mine $10 worth of crypto.  When I sell the $10 in crypto, how do I look at it from a gain/loss perspective, if I have held the crypto over 1 year (long term) 

[Anonymous]

Hello nbizic56,

Thanks for joining us today. As to your question, the cost basis you would have for the crypto is the value at the time you mined it. You cannot reduce that cost by any expenses related to the mining. Mining income is treated as ordinary income.

Additionally, because you mention it is a hobby, "Beginning in 2018, the IRS doesn't allow you to deduct hobby expenses from hobby income," so you won't be able to deduct the cost of electricity anywhere else if it is truly a hobby.

On the other hand, if it is more than a hobby and actually an additional source of income, you may be able to can claim the income and expenses on Schedule C, meaning the income is reported as the value when you mined it and the expenses are everything you determined as the cost to do that mining. However, you need to understand how the IRS determines the difference between a hobby and a business venture. This article will help.

Any capital gain or loss is determined by the difference between what you sold it for and the value of when you mined it, regardless of whether it is treated as a hobby or business venture.

I hope that helps.

[marctu]

@nbizic56 thank you for another question. For background, the IRS doesn't allow you to deduct hobby expenses from hobby income. You must claim all hobby income and are not permitted to reduce that income by any expenses.

Again @nbizic56, when you earn cryptocurrency from mining, it counts as regular taxable income. You owe tax on the entire value of the crypto on the day you receive it, at your marginal income tax rate.

Since you included the $10 as income in the year you received the $10 in crypto, when you sell if after a year, any amount over the $10 is a gain and any amount less than the $10 is a loss. 

Be well and safe.

All the best,

Marc T.

TurboTax Live Select Time Tax Expert

26 Plus Years of Experience Helping Clients

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[nbizic56]

So just to confirm, as a hobbyist miner, if I mine $10 in crypto per month ($120 per year) and sell it on the exchanges at fair market value ($120 in this example), then based on the answer the income I am claiming is $120 in crypto income so if I sell it for $140 I owe tax on $20 and if I sell it for $100, I claim a tax loss of $20? 

[Anonymous]

Correct.

The $120 mining income will be reported on Schedule 1 that flows to your 1040 as ordinary income and the $20 capital gain or loss will be reported on Schedule D.

[marctu]

@nbizic56 thank you for the follow up question.   So the $120 is claimed as ordinary income in the year received, and as you write for confirmation below you would have either a $20 capital gain or loss.  

Be well and safe.

All the best,

Marc T.

TurboTax Live Select Time Tax Expert

26 Plus Years of Experience Helping Clients

**Say "Thanks" by clicking the thumbs up icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"