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Receiving cryptocurrency from mining
Tax and expenses are treated differently for those mining as an investment or hobby, and those who mine for business, so you first need to determine your activity. As a general rule, whether you are mining as a hobby or as a business, any crypto you receive will be considered income. However, when you mine for business, you may benefit from certain deductions.
While IRS lists the following factors for determining whether activity (general not just crypto) is a business or a hobby, they add that all the following facts and circumstances should be considered:
- If the activity is carried out in a business-like manner with accurate records
- Whether the amount of time and effort put into the activity shows intent to make it profitable
- If you are dependent on the income for your livelihood
- Whether any losses are out of your control (or normal in a start-up business)
- Whether you change operating methods to improve profitability
- Whether you (or your advisors) have knowledge to continue the activity as a successful business
- Whether you have historical success (profit) in similar activities in the past
- Whether your activity makes profit and how much
- Whether there is expectation of future profit from appreciating assets used in the activity
Consult with a tax professional to determine if your mining activity is sufficient for a business or should be treated as a hobby.
Hobbyists and investors should declare cryptocurrency received from mining as additional income on line 21 (other income) of Form 1040 Schedule 1. Unfortunately, under current tax law hobbyists and investors cannot claim any expenses to reduce their tax liability.
- If determined to be a business, both income and expenses should be reported for tax on Schedule C - Profit or Loss from Business or on applicable Business Returns (form 1065, 1120 or 1120S).
- Income from a cryptocurrency mining business is subject to the 15.3% self-employment tax but business miners are eligible for a wider range of business-related expenses that can be deducted from mining income. Examples of expenses for business miners include electricity, computer equipment, rent or home office costs, supplies and software.
We recommend that you consult your accountant or tax attorney for advice related to how you can classify your mining activities and determine which deductions are proper for you.