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. But now that an increasing number of individuals and businesses are receiving mining income, tax compliance and tax planning become an imperative consideration for any reputable operation.

Tax implications of mining cryptocurrencies

Cryptocurrency miners have two separate tax exposures. The first is the tax at the fair market value of the virtual currency on the day that it is mined into gross income. Generally, the net earnings from this activity will be exposed to self-employment tax.

The second is the capital gains which are due on the sale of bitcoins viewed as a capital asset. The basis price for the coins will be the fair market value on the date of acquisition. Capital gains will be due on the difference between that basis price and the eventual sale price.

When a miner sells their cryptocurrencies that they have mined, they will have to pay capital gains tax on any profit that they have made while owning them. The exception here is if bitcoins aren’t viewed as capital assets,but are instead viewed as inventory. This would be the case if a miner’s core business is selling cryptocurrencies. In that case, any gains on the bitcoins would be taxed as an ordinary gain or loss.

IRS Notice 2014-21 clarifies the treatment for bitcoin miners. Specifically, miners must recognize income for each bitcoin mined during the taxable year. The amount of income is equal to the market price of bitcoin on the day it is awarded on the blockchain. This also becomes the miner’s basis in the bitcoin going forward and will be used to calculate gain/loss in the future when the bitcoin is sold.

Protecting Your Assets and Minimizing Tax Exposure

The first major step in choosing your tax treatment is selecting a business entity for your operations. You have four main choices:

Sole proprietorship

Partnership

C corporation

S corporation

To determine whether the S corporation is the right entity structure for your business, you have to know how it compares to your other options. The two main benefits of operating your business as an S-Corporation is relief from double taxation, and savings on employment taxes. Tax planning and industry financial expertise is critical in this area.

If you plan to raise capital or own real estate as part of your mining operation this should also be considered during your entity structuring planning and may require establishing multiple entities.

Most miners use expensive hardware and substantial amounts of electricity to verify transactions on a decentralized blockchain network. Mining expenses, such as electricity, would not be included into basis. Instead, they would be deductible in the taxable year as an expense. Maintaining proper documentation is essential. Depreciation of the equipment used in mining will be the other largest tax deduction for miners.

If you searching for CPA firms i to assist you with reporting cryptocurrency mining income and capital gains, contact Camuso CPA. Whether you need tax preparation services, assistance with properly reporting gains and income from virtual currencies on your taxes, cryptocurrency portfolio analysis, or any other service provided by a certified accountant, Camuso CPA can help.