Crypto Mining Tax: The Ultimate US Guide for 2024

The crypto mining tax can range significantly in the US since crypto mining is taxed as income, with rates depending on your total income during the tax year.

Let’s cover how crypto mining is taxed in the US, how to report crypto mining rewards, taxes for node operators, how to reduce crypto mining taxes, and much more!

What is crypto mining?

Crypto mining is the process of validating crypto transactions on the blockchain by miners who perform the necessary computing work to win the bid for becoming the validator who will then win mining rewards resulting from the creation of new units of a particular cryptocurrency.

Crypto mining was introduced with Bitcoin, using a Proof-of-Work (PoW) protocol, where miners receive new units of BTC from validating transactions on the Bitcoin blockchain.

Proof of Work – PoW

Proof of Work (PoW) is a protocol originating new cryptocurrency units with miners solving a complex math problem to verify transactions of a particular blockchain network and proving their work.

What are Mining Rewards?

Mining rewards are the compensation that miners receive for performing the necessary work to confirm transactions on a PoW-based network like Bitcoin. 

How is crypto mining taxed in the US?

In the US, receiving Bitcoin or other cryptocurrencies from mining is a taxable event, subject to income taxes if you’re an individual miner or corporate taxes if you’re a corporation.

If you’re a crypto miner operating as a business, you’d need to recognize the coins from mining as income at the time of your receipt. You will need to pay income tax while filing your personal tax return if your business is a disregarded or passthrough entity. If you operate your mining business under a corporation structure, your company will need to pay corporate income tax for net profits from the mining operation. 

If you are doing crypto mining as a hobby, you will also need to report your mining rewards as income in your tax return.

Mining Rewards as Taxable Income

According to the IRS, mining Bitcoin or another cryptocurrency is a taxable event, where you’d have to recognize the Fair Market Value (in USD) of the mining rewards at the time you receive them. 

Capital Gains on Disposal

Selling your mined cryptocurrency after you receive it is a taxable event in the US, subject to capital gains taxes.

Your capital gains will be the difference between the sales proceeds and the cost basis (the FMV of the mining rewards when you initially received them). 

Quarterly Payments

If you earn taxable income, you would have to file a tax return and you may need to pay quarterly taxes every 15th of April, June, September, and January.

This is a good way to spread your income taxes over the year instead of paying a huge lump sum since usually there is no tax withholding when you receive mining rewards during the year.

How to calculate mining taxes?

To calculate mining taxes, you’d need to determine their Fair Market Value (in USD) every time when you receive a new batch of mining rewards. 

Since you can receive many batches of different cryptocurrencies throughout the year, it quickly becomes difficult to track these FMVs.

The easiest way to calculate mining taxes is to import your transactions to a crypto tax software, which will automatically track your crypto mining income.

Examples

Scenario of a miner who needs to pay income tax 

• In May 2021, John started to mine Bitcoin as a hobby (not as a business);
• He’s spending, on average, $300 in electricity costs per month;
• In June 2021, John received his first 0.05 BTC as mining rewards;
• In June 2021, 1 BTC was worth $30K;
• In June 2021, John needed to recognize the FMV of those rewards: $1,500 (0.05 BTC * $30K) as income;
• John will have to report $1,500 on his income tax return for 2021;
• His income taxes will depend on his total income level for the year;
• Unfortunately, John cannot deduct his electricity costs because hobby expenses are not deductible.

Scenario of a miner who needs to pay capital gains tax

Let’s continue with the same example as above:

• In December 2021, Bitcoin reached $69K, and John wanted to sell his 0.05 BTC rewards;
• His 0.05 BTC was worth $3,450 in December 2021;
• His initial cost basis (FMV) was $1,500;
• John had to report a capital gain of $1,950 ($3,450-$1,500);
• John held his BTC for less than 12 months, leading to short-term capital gains taxes, ranging from 10% to 37%;
• Let’s assume his tax rate* was 35%;
• John needed to pay $682.5 in capital gains tax in 2022 (when John filed his 2021 tax return).

*John’s final tax rate depends on his situation (e.g., filing status) and other factors. This rate is used for simulation purposes only.

How are nodes taxed?

Nodes are taxed similarly to crypto mining, as you’re receiving passive income from running crypto nodes.

Every time you receive new crypto rewards from running nodes, you’d need to determine their Fair Market Value (in USD) at the time you received them.

You need to report that node income in your income tax return alongside your total income for the year.

Is crypto mining taxed twice?

Crypto mining can be taxed “twice” because you’re taxed at the income level when you receive mining rewards and then taxed at the capital gains level when you sell them.

Firstly, you need to recognize the Fair Market Value (in USD) of the mining rewards when you receive them. 

Secondly, if you sell your mining rewards, you’d be taxed at the capital gains level based on the difference between the sales proceeds and the initial cost basis (FMV of the mining rewards). 

The mining income you recognized is never taxed twice because you can deduct it from your sale of the mining reward as cost basis for calculating your capital gain.

How to report crypto mining on taxes

Crypto mining is taxed in the US, meaning that you have to report all the income you had from mining each tax year by using the correct tax forms as an investor. If you’re an incorporated business, your mining income will be taxed at the corporate level, with different filing requirements. 

Crypto mining as a hobby vs as a business

If you mine crypto as a hobby, every time you receive new coins from mining, you’d need to determine their Fair Market Value (in USD) when you received them.

You have to report all your crypto income on your Form 1040, from crypto mining rewards to node income, staking rewards, crypto interest, NFT sales from your creations, and more.

If you’re a crypto mining business, you’d need to report your rewards as business income and you can deduct your mining related expenses.

Tax forms for crypto mining in the US

As a mining hobbyist, you should report your rewards from crypto mining as income on Schedule 1 of your US Individual Income Tax Return (Form 1040).

If you are mining crypto as a sole proprietor or single-member LLC, you’d need to report that as business income on Schedule C.

Strategies to Minimize Crypto Mining Taxes

You minimize crypto mining taxes by:

• Donating mined cryptocurrency to a charitable organization and getting an itemized deduction;
• Take out crypto loans to generate investment income and deduct the loan interest as investment interest expense for itemized deduction;
• Invest crypto in retirement products like IRAs or Roth IRAs;
• Move to a crypto-tax-friendly state;
• Move to a crypto tax-free country.

Tax deductions for crypto miners

Crypto miners operating as a business have a lot of opportunities to reduce their taxes from crypto mining income.

However, as a general rule under the current tax laws, hobbyist miners don’t have the same deducting opportunities. However, they can still reduce their capital gains taxes with other strategies. 

Electricity

You can deduct your electricity costs from crypto mining if you’re mining as a business and earning income from it. The same is not true if you’re a hobbyist.

Equipment

You can deduct your upfront costs for equipment (e.g., mining rigs) if you are crypto mining as a business. If you’re mining as a hobbyist, this deduction is not allowed.

Repairs & maintenance

You can also deduct ongoing costs for repairs/maintenance from your mining machines if you’re mining as a business (not possible if you mine as a hobby).

Rent

As a business, you can deduct regular costs as an office or building lease, lowering your tax bill from your crypto mining income.

Losses

You can use your capital losses to offset your capital gains. In addition, you can deduct up to $3,000 in net losses each year (valid for 2023) to offset your ordinary income for the year, reducing your total tax bill by crypto tax loss harvesting.

Conclusion

Yes, you have to pay taxes on mining rewards in the US, whether you are doing mining as a hobby or a business. Your crypto mining tax rate will depend on the nature of your activity, from corporate taxes to income taxes.

Fortunately, you can use crypto tax software like CoinTracking to import your mining transactions and determine the taxes you’d need to pay over your new coins.

Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing.