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Level 1

How do I report Cryptocurrency Mining income?

I started mining cryptocurrencies this year, but I can't figure out how to report them - can anyone help me?
16 Replies
Level 14

How do I report Cryptocurrency Mining income?

This is an area where there is not much in the way of guidance.  However, see the attached link for some commentary on this area:
<a rel="nofollow" target="_blank" href="https://turbotax.intuit.com/tax-tips/tax-payments/tax-tips-for-bitcoin-and-virtual-currency/L1ZOgU00...>
Level 1

How do I report Cryptocurrency Mining income?

what happens if there is no recorded of that day when it was generator but you have less than 400 value?
Level 20

How do I report Cryptocurrency Mining income?

You have two different income streams to consider.

When you mine the coins, you have income on the day the coin is "created" in your account at that day's exchange value.  You can report the income as a hobby or as self-employment.  If you report as a hobby, you include the value of the coins as "other income" on line 21 of form 1040.  Your ability to deduct any expenses is limited -- expenses are itemized deductions subject to the 2% rule.

If you report as self-employment income (you are doing "work" with the intent of earning a profit) then you report the income on schedule C.  You can fully deduct your expenses (if you can prove them) (see later).  The net profit is subject to income tax and self-employment tax.

Your second income stream comes when you actually sell the coins to someone else for dollars or other currency.  Then you have a capital gain (if they were worth more when you sold them than when you mined them) or you have a capital loss (if they are worth less when you sell them).  And the gain or loss will be taxed differently if it is a short term gain (you held it one year or less) or long term (more than one year).  You will need to keep track of each coin you create (date, value) and when you sell it (date and value).  

And of course, if you immediately sell the coin for cash, then you only have income from the creation, you don't also have a capital gain or loss.

Now, as far as expenses are concerned, if you are doing this as a schedule C business, you can take an expense deduction for computer equipment you buy (as depreciation, subject to all the rules) and your other expenses (mainly electricity, maybe a home office).  But you need to be able to prove those expenses, such as with a separate electric meter or at least having your computer equipment plugged into a portable electric meter so you can tell how much of your electric bill was used in your business.  Unless your expenses are very high, they won't offset the extra self-employment tax, so you will probably pay less tax if you report the income as hobby income and forget about the expenses.  (On the other hand, if you report it as self-employment and pay SE tax, that adds to your credits in the social security system which may allow you to qualify for a higher retirement benefit.  Having self-employment income on schedule C also allow you to claim some tax deductions like an IRA that you can't claim if all your income is hobby or "other" income.  So there may be benefits to paying SE tax in the long run.)

If you earn more than a couple thousand dollars per year you will need to think about making estimated tax payments as well.

Level 1

How do I report Cryptocurrency Mining income?

Awesome, thanks for the advice! That can all be handled with the TurboTax Premier package, right?
Level 1

How do I report Cryptocurrency Mining income?

Here's the issue as I see it, many people mine in pools so it's next to impossible to get the correct value of the crypto being mined unless one uses prohashing or other pools like theirs.  Also what about coins that aren't on exchanges yet but are being mined, they have no market value at the time they're being mined.  I can totally see a loop-hole here, where people abuse this.
Level 20

How do I report Cryptocurrency Mining income?

If you are in a pool, the income is reported when the currency is actually credited to your wallet in a form you can access, spend or trade.  Just earning coins (0.001 per minute or whatever) is not income unless it is actually deposited to your wallet, the same as being paid an hourly wage in an office job isn't taxed until a paycheck is actually issued.

If you are really getting spendable coins committed to your wallet more often than once a day, you have a recordkeeping problems for sure.

Be aware that cryptocurrency is not anonymous -- the ledger is public.  As soon as you give a bank account number to an exchange to cash out your currency, your entire transaction history forever is vulnerable to the IRS if the subpoena the exchange.  So it is to your long term advantage to be as honest as you can, within the limitations of the system.
Level 1

How do I report Cryptocurrency Mining income?

@Opus 17  I totally agree with you, I use coinbase just because it's open and transparent to US regulators and I don't want to get on the wrong side of the law.  

Also here's another issue, when someone dumps coins on yobit for btc, eth etc and then moving it to cryptopia to hold for the so called "hard forks" instead of coinbase.  And then after a year they move it to coinbase to sell for USD.  How are taxes treated for this?  Is his gain/losses going to be calculated from when he moved the coin to coinbase or from when he got it on yobit?
Level 20

How do I report Cryptocurrency Mining income?

@zakdaks you lost me on most of that question.  Your gain is the difference between the ultimate selling price and the original basis or purchase price of the asset.  If you use yobit to buy btc and eventually cash out for USD, the basis of the asset is whatever you paid to yobit.  If you paid very little, then you may have a very large gain.

(The same thing applies to any asset; if your granddad bought a pack of baseball cards for 25 cents and gave you one that turned out to be worth $10,000, then your capital gain will be $9,999.75.)
Level 14

How do I report Cryptocurrency Mining income?

Also keep in mind that if you "exchange" one cryptocurrency for another, this will be a taxable event.  No different that selling Microsoft stock and buying Apple stock.
Level 20

How do I report Cryptocurrency Mining income?

@Rick19744 can you substantiate that?  My understanding is that the IRS only taxes "real" things.  Trades among different cryptocurrencies are not the same as stock trades because the cryptocurrencies are not real and not recognized as real, taxable things.
Level 20

How do I report Cryptocurrency Mining income?

@Rick19744 @zakdaks Rick is correct.  There was a change in the tax cut bill that was signed in December 2017.  For 2017 and before, it is unclear whether cryptocurrencies are taxed at every exchange or only when cashed out.  Beginning January 1, 2018, every exchange (bitcoin to ether, to lite coin, etc.)  is treated as a capital gain or loss using the US$ conversion rate in effect on that day.   So this really ups the recordkeeping burden.  Some parts of my previous answer from 2 months ago are now wrong.
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Level 14

How do I report Cryptocurrency Mining income?

There are still many things that are unclear about this area since there are no regulations, etc. and don't expect any for quite some time.
I think most commentators (at least the ones I tend to follow) agreed that the exchange of one cryptocurrency for another was a taxable event even before your noted change.  It just makes sense and follows the spirit of IRS notice 2014-21.   Attached is just one article:
<a rel="nofollow" target="_blank" href="https://www.thetaxadviser.com/newsletters/2017/apr/cryptocurrency-taxes.html">https://www.thetaxadvi...>
Level 1

How do I report Cryptocurrency Mining income?

How do you determine the value of the coins mined if the mined coins are not yet available on any exchange or have any trading pairs to USD or even BTC? The hope is that they will one day become tradeable, but they were not tradable or yet had a market value on the day they were mined.
Level 1

How do I report Cryptocurrency Mining income?

Re "coins are not yet available on any exchange" I think simply, income 0 and cost basis 0. People keep forgetting IRS notice 2014-21 uses term "convertible virtual currency" is taxable. Now since a coin is not listed anywhere is definitely not "convertible". (This also makes me think only cryptos with direct USD pairs are considered "convertible" so for example DGB to be not but for the sake of tracking you still need report BTC->DGB but if you wanted to use "privilege" DGB is not convertible and you go DGB-BTC then I guess and gain in BTC would be "income" but then how you "going back" to original BTC you sold for DGB) anyhow I'm 100% sure there is nothing to report for coins not listed anywhere. They are not convertible. And if ever became, you had 0 income X years ago and cost basis 0, so once sold you have 100% gain to report as taxable. (Very side note, I would do same for forked coins, cost basis 0 because there were no price at the time of fork, unless some exchange listed it before the fork but then the price is fake in a way like a "future contract" while you should report as fair market value, so logically 0, no market available until coin available)