In cryptocurrencies like bitcoin and ethereum, the most important people in each transaction are miners. They keep the network up and running and, in exchange for their volunteered computing power, receive a small amount of the currency as a reward. However, miners are mainly confused when it comes to tax day, as their income is not a result of crypto trading or capital investing.
The Business Of Crypto Mining
Around the world, several businesses have come up which focus solely on mining cryptocurrencies. A majority of them are run by computer programmers or hardware enthusiasts who can work their way around complex hardware systems. Starting up a mining business is capital intensive, as the costs of a “mining rig” can run up to thousands of dollars to ensure making a significant profit.
Speak to any miner, and they shall tell you that it isn’t an easy business to be in. High costs, difficult hardware, and then there’s the much-dreaded tax day.
However, there’s some good news. Miners can make use of tax breaks to their advantage. Tax breaks can help with keeping their returns intact and maximizing business profits.
The Taxes Of Crypto Mining
According to U.S.A’s Internal Revenue Services (IRS), cryptocurrency mining is treated as a business income, irrespective of scale. The IRS doesn’t differentiate between huge mining pools and an amateur mining rig set-up in a garage. Any mining income above a paltry $400 is to be reported to the IRS.
If the rigs are used to mine multiple coins, the tax is calculated for each coin and at the market value of that coin at the moment it was first mined. Additionally, an amount of 15.3 percent tax is levied over and above the income tax amount if the set-up is not registered as a business. Since the income exceeds $400, it gets classified under Schedule C as “self-employment income.” Hence, it certainly makes more sense to register mining as a legitimate business, instead of telling the IRS that your high-income producing rigs are a garage hobby.
The Benefits of Registering as a Business
Apart from avoiding the “self-employed” tax, various tax policies meant for corporates can be used for a mining business, provided there is a significant income generated.
In case a miner generates enough coins that have a total market value of $60,000 or more, he/she is eligible to register the business as an “S Corporation.” By doing this, the miner can save on paying more tax by eliminating the need to pay the self-employment tax.
As mining is a hardware intensive industry, the IRS has taken care of the rig machine depreciation, that naturally occurs over time. Using a method called the Accelerated Cost Recovery, machine depreciations can be calculated and taken into consideration over a long-term period of three to five years. Also, by utilizing the Section 179 rules for depreciation, a miner can deduct the rig’s entire purchase price for the year when it was purchased.
Tax When Mined Coins are “Swapped”
Over the years, miners have moved from solely mining bitcoin to other altcoins due to the better earning they can generate. Since altcoins are relatively new, it is possible that miners rewards are greater.
Due to this, miners may sometimes opt to “swap” all their previously mined coins in favor of another coin. But for the IRS, this event is considered a capital transaction and is treated as a short-term capital gain in the tax books. Hence, miners must report any income generated from “swaps” separately and not as a part of mining income