Taxation is a complex field, and with crypto mining, it only gets more complicated. With the IRS rules and regulations changing to match crypto’s ever-evolving market, this becomes more complex as well.
Every single day, we deal with different crypto miner clients and help them with their long- and short-term tax strategy. We try to help them file their taxes efficiently, make them avoid all extra taxes to benefit their businesses, and take advantage of tax deductions.
After spending a lot of hours interpreting numbers and rules, we have put together Tax and Accounting Tips for Crypto Miners.
Before getting into these rules, make sure you understand some of the crypto tax processes first. Once you go through some of these rules, you can review a FAQ about crypto taxations as well.
The general rule for crypto mining by an IRS Notice 2014-21 states:
If a taxpayer’s mining of virtual currency constitutes a trade or business, and the mining activity isn’t undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to self-employment tax.
Moreover, the information below is general advice. The taxation process is a case-by-case interpretation. Please consult a CPA first before making any decision on your crypto taxation.
Treat Your Crypto Mining as a Business
There is a simple reason for it: it saves on your taxes.
Schedule C is filed when you are mining crypto as business. You are also eligible for tax deductions under this category. Moreover, you will be liable to pay self-employment tax.
You can claim more deductions and can get more benefits by claiming crypto mining as your business. Once the deduction is claimed, it can get you to save more money into your hand instead of giving to the taxation process. These deductions can be equipment used for mining, internet fees, home office, and other business-related expenses.
However, as mentioned before, crypto taxation is a case-by-case analysis and is subject to change to fit into your circumstances. Make sure you consider whether treating it as a business will be beneficial, and read up on crypto taxes as a business vs a hobby and speak with a crypto CPA before making your decision.
Some of the potential factors to consider in your estimation will be the time spent on crypto mining, dependence on mining, profitability, and long-term viability.
Create a Business Entity (LLC, Partnership, S-Corp, etc).
There are two main benefits that you get when setting up a business entity (LLC, Partnership, S-Corp, etc): tax deductions, and case-by-case protections with hack and losses.
Setting up a business entity opens you up to tax deductions and benefits from treating your mining as a business.
Cryptocurrency mining can be volatile, and there is a lot of room for different hacks and scams as well. Crypto miners and traders have reported scams, their exchanges getting closed, and their wallets being hacked. In some scenarios, with a business entity can be a potential refuge for your crypto mining and in some cases you can use corporation loss to claim tax deductions for up to three years.
Having a business entity comes with some cons as well. For example, this can be costly and may be very complex for you to handle as well. Best to consult with a CPA who understands crypto mining and your scenario to walk you through the benefits.
Take Advantage Of Tax Deductions
You need to be well-informed about different taxation processes and how you can claim deductions out of them.
We have listed some of the deductions here:
- Use electricity deduction
- If you are a miner, you may deduct some of the amount of the equipment which you used while mining the crypto.
- You may also claim electricity costs for deductions if you have effective logic behind it.
- Moreover, if by any chance, you have apply some maintenance expenses, this may also be considered under deductions.
Order Your Assets Correctly
Since crypto taxation is very new to the market, you get to organize everything. Make sure all your transactions are properly tracked and you have reported them as well. By keeping your crypto mining expenses and assets separate, it makes filing your taxes easier.
This is not only true in the context of crypto mining, but also for crypto trading as well. It can become very messy if you’re not tracking your crypto from day one and then want to file all of your taxes at once.
Consider Using a Tracking Tool
Since there are hundreds of transactions happening at once, consider using tracking software for your crypto assets. You should also note that selling your mined crypto is also a second taxable event.
To avoid any confusion while filing your taxes, crypto tracking software can a huge relief and can give a good estimation of our crypto trading.
Consult a CPA
Filing your taxes is a very complex process. It’s very risky as well since it involves your money. Before tackling any of your crypto taxes, we recommend hiring a professional crypto CPA for consultation.
Since numbers are indeed very complex to under and then IRS rules further add complexity to the issue, it’s always advisable to consult a knowledgeable person before.
