Paying Taxes on Mined Crypto

On: February 14, 2020

There are thousands of individuals and businesses around the world mining cryptocurrency as a hobby to learn about software, or as a serious for-profit business to earn a living. As of 2019 there were some 10,000 full bitcoin nodes worldwide (a full node is a server that maintains and verifies every single transaction on the entire bitcoin ledger from the very first block “mined” in 2009). Because there is not much in the way of official tax guidance from the IRS, many crypto miners are sure about how to stay compliant when paying taxes on mined crypto. From the view of tax and financial authorities in the US, coins or tokens earned from mining crypto are considered income, and should be treated as income for tax purposes. Maintaining public blockchains for cryptocurrency is called “mining” as part of an extended metaphor envisioned for bitcoin by Satoshi Nakamoto, the pseudonymous author of bitcoin’s original white paper. The first cryptocurrency’s creators were deliberately using public key cryptography in a sophisticated and very innovative design architecture to create an open source, distributed financial system that digitally simulates the inherent properties of gold. Gold is scarce, fungible, and durable, making it well suited for centuries as a unit of account, medium of exchange, and store of value. But there’s a better metaphor for understanding this new technology and the industry that’s grown around it in terms of paying taxes on mined crypto. And it’s actually not quite a metaphor. The literal, technically correct description of crypto “miners” is: franchise book keepers, or accountants. Bitcoin is essentially a franchise financial services business with an accounting product and process for delivering it that’s so clear, simple, and unwavering, that management is automated by software. “Miners” are franchisees that don’t have to apply or ask for permission to open a franchise. They just download the software and invest their computing power and electricity costs to maintain and update Bitcoin’s ledger. The software is hard-coded to pay franchisees in units of its own accounting currency for venturing their resources to maintain the books. When you earn bitcoin, ether, electronium, dogecoin, or some other cryptocurrency from mining, you report the income to the IRS as you would report income if you were leasing your computer’s processing power to an accounting firm for a fee. Miners should report their crypto earnings to the IRS in the USD value of the coin or token at the moment they receive it for solving a hash or as a regular payout from a mining pool. If you file it as income from a hobby, you list it on line 21 of your form 1040, and your deductions for expenses will be limited. You can also report it as self-employment income on schedule C of the 1040, and fully deduct related expenses that you can prove with documentation. Paying taxes on mined crypto is, however, a two-part process. It’s reported as income at the time the coins are mined. But when you sell the coins for other crypto or for dollars, the IRS considers the coins a security subject to capital gains or losses to be reported on a form 8949.