Miners are a critical part of the cryptocurrency ecosystem. New coins and bitcoin forks are being developed every day with the goal of making mining easier for both existing mining pools and new market participants alike. But now that more and more individuals and businesses are receiving mining income, how should this activity be reported to the IRS?
You can’t avoid paying taxes on your cryptocurrency mining activity. Even trying to evade taxes can land you in serious trouble with the IRS. As a result, every crypto miner must be clear on how to properly report their mining activity on their tax returns. Fortunately, Happy Tax offers tax advice and planning services that can minimize mining tax liability and keep you on good terms with the IRS.
How Does the IRS Tax Crypto Mining Income?
Despite all of our preferences to the contrary, there are very few ways of making money that doesn’t trigger tax liability. This is especially true in the cryptocurrency world. Mining bitcoin and other cryptocurrencies is a taxable activity, regardless of whether you do it as a hobby or for a job if you make more than $400 in mined coins for any given year.
Understanding how to properly report your cryptocurrency mining income to the IRS involves understanding your liabilities and deductions. Even if you only mine cryptocurrency on a small scale, the IRS treats mining as a business subject to self-employment tax. Just like driving for Uber or offering guitar lessons, mining cryptocurrency is basically a side-hustle. As a result, the extent of your tax liability varies based on several factors.
As long as you aren’t an actual at-will employee of a crypto mining business, mining income qualifies as self-employment business income reported on Schedule C of your annual tax return. The IRS requires miners to recognize income for every coin they mined in a taxable year. The amount of income you must report equals the market price of the mined coin on the day it was awarded to you. This is the “basis” of the coin that is used to calculate actual gains or losses in the future. By way of example, let’s assume that a miner is awarded one bitcoin when the market price is $8,000 per BTC. This creates $8,000 worth of taxable income for that year. If this same miner later sells this bitcoin when the price goes up to $10,000 per BTC, she has generated a taxable gain of $2,000. This $2,000 is taxed separately as a capital gain, which should be reported on Schedule D of the miner’s tax return in the year that she sold the coin.
Fortunately for the crypto miners out there, it’s not all bad news. You are entitled to deduct eligible expenses from your self-employment business. Most miners use expensive hardware and tons of electricity to verify transactions on a decentralized blockchain network. These expenses are deductible, so long as your mining operation is substantial enough to be considered an actual business. If your mining activity is not substantial or continuous, your deductions may be impacted.
Paying Taxes is Not Optional
Every year, the government loses about $214 billion in unreported self-employment income – about half of total nationwide tax evasion costs. This means the IRS is keeping an eye out for people who appear to have more income than they are reporting on their tax returns. This is especially true for the cryptocurrency community, which has already been the target of IRS enforcement actions aimed at shaking out tax evaders.
If you make crypto mining income and you don’t include it on your tax return, you could get hit with serious fees and penalties. Not only will you have to pay taxes on the income you failed to report, but you may also be subject to additional taxes if the income discovered bumps you into the next tax bracket or affects your deductions. Even worse, the IRS can impose an inaccuracy-penalty of up to 20 percent of the amount you underpaid. That’s on top of a 5 percent monthly late fee on the amount you owe, up to 25 percent. Say you failed to report $1000 you made from bitcoin mining in 2017. If you don’t report it on your tax return this year, the IRS can come after you for the taxes you owe on this money as well as an extra $200 penalty for inaccurate reporting, plus up to $250 if you’re more than five months late coming up with the payment. The IRS also has considerable authority to collect the money it’s owed. It can make you forfeit your tax refund or seize property to make up for the difference. The IRS can also revoke your passport or even file charges against you in federal court if you fail to pay your taxes. In the most extreme cases, crypto tax evaders may even land in federal prison.
Evading federal taxes is a dangerous game. It’s tempting, sure. Especially because it seems like everyone else in the cryptocurrency community is doing it. However, IRS penalties for tax evasion are severe. The agency even has a whistleblower program which gives an informant a percentage of taxes they help the IRS recover. So, all it takes is one angry ex or irritated roommate to get you on the wrong side of the IRS. Evading taxes can cost you big in the long run, so better to play it safe and properly report your mining income on your federal tax return this year.
The IRS recognizes that Bitcoin mining tax is a subject vexed by uncertainty. As a result, the agency recommends every miner get advice from a tax professional before filing their returns this year. Happy Tax employs the most skilled and experienced Certified Public Accountants that specifically focus on the needs of cryptocurrency investors and miners. If you bought, sold, or mined cryptocurrencies in 2017, the professionals at Happy Tax can help you prepare your tax returns this year. If you plan to start mining as a business or a hobby in the future, Happy Tax can also help you minimize your tax liability in the coming years. If you mine crypto coins, contact a cryptocurrency accountant today to make sure you’re ready for tax season.