How US miners file taxes on their Bitcoin mining income

If you’re filing taxes as a Bitcoin miner in the United States, you need to understand the IRS’s guidelines for mining income.

IRS considers mining rewards as income

The IRS first released its guidance on cryptocurrency taxation in 2019, clarifying how taxes on the mining industry should be reported. The IRS considers mining profits to be income for tax purposes, and like any income, miners are required to pay taxes.

Bitcoin miners would be wise to be aware of the tax implications of their operations, as failure to comply could result in action from the IRS.

The key thing to note is that Bitcoin mining rewards are taxed when they are received, not when they are sold . Every time a Bitcoin miner receives the Bitcoin earned from mining in his wallet, the market price is used as the cost basis for reporting gross income. Miners will report gross income on Form 1040, which is the official form of the US individual income tax return.

“When a taxpayer successfully mines virtual currency, the fair market value of the virtual currency from the date it is received is included in gross income,” the IRS said.

According to statistics from crypto tax software TaxBit, commercial miners account for a large proportion of the mining population in the United States.

Commercial miners vs. retail miners

Those who engage in mining activities on a commercial scale will need to report their income and expenses on Schedule C (Form 1040). Mining taxes will be allowed to be claimed as a deduction.

According to the IRS, miners can deduct expenses such as hardware, equipment, electricity, internet and other business costs from their mining income.

Another key point to remember is that self-employed individuals must pay a 15.3% self-employment tax by attaching Schedule SE to their Form 1040, according to CoinTracker.

There are also miners whose primary income does not depend on mining. Taxpayers must report this "non-commercial" mining income as additional income on Schedule 1 (Form 1040). Non-commercial miners cannot deduct taxes when they pay taxes.

Mining Taxes and Capital Gains

If miners sell and liquidate their newly acquired digital currency immediately, their profits are not subject to capital gains tax. However, if they sell their cryptocurrency for a profit, they will need to consider capital gains tax and income tax.

While bitcoin mining profits are classified as income, the IRS considers the cryptocurrencies themselves to be property, so every time you sell them for cash or exchange them for other cryptocurrencies, you create a capital tax event.

To calculate and report capital gains and losses from the sale of cryptocurrency, taxpayers will need to file IRS Form 8949 and carry over the subtotals to Schedule D (Form 1040). Each sale of mined cryptocurrency must be reported on the tax return to determine the correct capital gains and capital losses.

Record all transactions

Taking all of the above into account, calculating the final tax can be a daunting task. Miners can use tax software such as TaxBit to calculate how much they owe when tax season arrives.

In order to be able to calculate taxes, it is a good practice to keep reliable records. Miners should properly record transaction data, including time, market price and amount of cryptocurrency sold. This practice is also important when it comes to accurately declaring taxes to claim deductions.