Bitcoin Mining Taxes and Regulation
Table of Contents
- Bitcoin mining is taxed differently depending on if it is classified as a business activity or a hobby.
- Bitcoin mining businesses can deduct operating expenses from their gross income.
- Bitcoin Mining regulation and taxes varies between states, and is yet to be addressed at the federal level.
The Implications of Bitcoin Mining Taxes and Regulation
Reporting capital gains and losses from trading or investing in Bitcoin is relatively straightforward, but bitcoin mining generates different tax implications. Often, and especially without careful planning, Bitcoin mining can create multiple tax implications that must be reported on separate forms. Evolving state and federal regulations of Bitcoin mining have a direct impact on tax implications, and some regions have emerged as tax and cost havens for Bitcoin mining.
Bitcoin Mining Taxes
Bitcoin earned through mining is taxed at your regular income tax rate as gross income. The amount of tax owed is assessed based on the value of the bitcoin on the date it was received, meaning the date that the bitcoin was mined. The amount of tax owed also depends on if your mining operation is classified as a business or a hobby.
If you are an employee or an independent contractor of a Bitcoin mining operation and earn bitcoin as payment, your employer will provide you with a W-2 or 1099 respectively that documents gross income from mining. However, bitcoin miners are most often considered self-employed, and miners must voluntarily report their gross income from mining to avoid fines and taxes.
Bitcoin mining can be profitable, but it also involves considerable operating expenses to begin and continue mining. If you mine bitcoin as a business, then you may be eligible for certain deductions to lower your tax liability. §162 of the Internal Revenue Code states “[t]here shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Miners may deduct certain expenses from their mining income.The cost of computers, service, and electricity used to mine bitcoin can be deducted against your mining income. If you register your Bitcoin mining operation as a business, you will be able to deduct more expenses than if it is categorized as a hobby.
Bitcoin Mining Tax Forms
Taxes from Bitcoin mining activities are reported differently than taxes from investing, purchasing, or selling bitcoin. If you received bitcoin from mining, it’s important to disclose whether you received them as an operating business or as a hobby. How you classify your bitcoin mining activity will determine how it is taxed by the IRS and how it should be reported.
- Schedule C: If you operate a bitcoin mining business, report this income on Schedule C and deduct your expenses. As a business, you will likely have to pay an extra self employment tax.
- Schedule 1: If you report your bitcoin mining as a hobby, report your income from mining on Line 8 of Schedule 1. As a hobby, you will not owe self-employment tax, but you will not be able to claim as many expense deductions.
Taxes on The Sale of Mined Bitcoin
Selling mined bitcoin creates a second taxable event, separate from the original mining event. The value of the bitcoin at the time it was mined, which is taxed as ordinary income in the first taxable event, becomes the cost basis of the bitcoin as a capital asset.
When a miner sells bitcoin, the dollar value received will be reported as profits or losses and offset against the miner’s cost basis. If the value of the bitcoin is higher at the time of the sale than the cost basis, then the seller has a capital gain. If the value is lower the miner has a capital loss. Every sale or trade of mined bitcoin must be reported on an IRS 8949 tax form.
Bitcoin Mining Regulations
At the time of writing, there are no federal laws explicitly prohibiting Bitcoin mining in the United States. There are also no federal laws that confirm its legality. Enacting regulation of Bitcoin mining has been largely left to state governments.
State Regulations on Bitcoin Mining
Regulation on Bitcoin mining is highly variable between states. Some states, like Rhode Island, Kentucky, Iowa, Montana, and Wyoming, have introduced and passed legislation to encourage Bitcoin mining activities in the state by offering tax breaks, enhanced legislation, and regulatory sandboxes. Many state governments want to encourage mining operations to establish themselves in their state because they could gain significant tax revenue, employment, and public utility revenue.
Montana continues to lead the development of Bitcoin mining and transaction legislation. In 2017, Montana Governor Steve Bullock used grant money to fund Project Spokane, a large Bitcoin mining project. In 2019, Montana passed a bill making blockchain-based coins exempt from security laws.
In 2018, the government of Wyoming signed a bill providing an exemption from money transmitter laws and regulations for digital currency transmission, as well as a subsequent bill exempting digital currencies from property taxation. In 2019, legislation was passed to provide digital currency developers, sellers, or exchange facilitators exemptions from certain securities and money transmission laws. Additional legislation was passed that permits companies to issue digital or “certificate tokens” in lieu of stock certificates.