Cryptocurrency mining - should I file as a hobby or Schedule C?

[msawyer77]

Last year I bought six gaming desktops and a dedicated Bitcoin mining device to mine Bitcoin and Ethereum. I mined over $6000, but now that I entered that into TurboTax (desktop), it increased my Federal tax due by $2000 and dropped my state refund about $300 -- essentially a $2300 net increase in Federal/state tax. I entered the crypto mining as "other income".

I use a site called CryptoTrader.tax (soon to be renamed Coin Ledger), which aggregated my mining proceeds from NiceHash, Coinbase, and BlockFi, helping me calculate cost bases, capital gains, and most importantly, the net mining proceeds.

David Kemmerer, the CEO of Coin Ledger, wrote an article (https://cryptotrader.tax/blog/how-to-handle-cryptocurrency-mining-on-your-taxes) where he says that you can claim your mining proceeds as either a hobby or as a business on a Schedule C. If done as a hobby, nothing can be deducted. However, if done as a business on a Schedule C, I would be able to deduct the cost of the computer hardware, which would significantly reduce my tax bill. I do not have an LLC or DBA, but I don't think individuals are prohibited from filing a Schedule C in their own name, as opposed to a registered business entity.

I want to know if I can LEGALLY, LEGITIMATELY go the Schedule C route. Mr. Kemmerer's article doesn't give guidance one way or the other. I am NOT looking to write off the cost of electricity (I don't have a separate meter), and I am NOT looking to do a home office deduction. But being able to write off at least some of the expense would be very helpful. But only if I can do so legally and legitimately; I don't want to guess and get it wrong.

[ColeenD3]

It depends on your intentions. If you are pursuing this as a way to make money, then it is a business. If you are just having a good time, it's a hobby. You can't let how you are taxed determine this.

[msawyer77]

While it is fun, I was using it as a way to make some side money. Last year we used it to go on vacation and it was nice to be able to send proceeds over to the bank account and use the debit card to pay for everything and not have a big credit card bill at the end.

So my intentions are definitely to make money and ideally pay bills.

[Vanessa A · Accepted solution]

Since your intent is to make money, then this is NOT a hobby, this is a business to be reported on Schedule C. 

[richardkutta4]

Use Sch C and read tax code to understand other legitimate business deductions.  Hope you are using Qwk Home & Business.

[msawyer77]

Thank you. I did not set up a separate electric meter and because the computers are located in a couple different areas of the house, there isn't a practical way for me to ascertain the exact electricity cost (the IRS doesn't like guesstimates) and the home office deduction wouldn't be appropriate either. So it's really just the cost of the original acquisition of the hardware, and then ongoing maintenance -- repairs and upgrades. The first year obviously bore the largest expense but was still profitable. Subsequent years will be much more profitable.

So just so I'm clear, a "hobby" is activity done for fun, that just happens to bring in income. 

Matt

[Vanessa A]

Yes, a hobby is something you do for enjoyment without intent to make a profit.

[Mark L]

If you want to measure electricity use, take a look at the EVE Energy Strips or Smart Plugs. I have been using them to get usage on my rig.