📢 We're launching a brand new crypto tax app—DeFi & NFTs included. Join the waitlist for early access 🔥
Crypto Taxes
Crypto Taxes

The Beginner’s Guide to Crypto Mining and Staking Taxes

If you’re mining or staking cryptocurrency, you are incurring income that needs to be reported on your taxes.

Once you sell or trade that cryptocurrency, it gets more complicated. You’re required to keep track of the fair market value of your assets when you receive them and when you trade them away. 

Crypto mining and staking taxes can be difficult to navigate — so let’s walk through the entire reporting process. In this article, we’ll cover how you can properly report mining and staking income, save money on your tax bill, and stay in compliance with IRS guidelines. 

Crypto mining vs. crypto staking 

Before we go any further, let’s take a moment to break down the difference between mining and staking rewards. 

  • Mining: Proof of Work cryptocurrencies like Bitcoin have transactions verified by miners, who solve complex mathematical problems with sophisticated computers and get rewarded with tokens. 
  • Staking: Proof of Stake cryptocurrencies ask users to lock up a percentage of their holdings. One of these “stakers” are randomly chosen to verify the next incoming block of transactions. Stakers are then rewarded with tokens. 

How are mining and staking rewards taxed? 

If you are mining or staking cryptocurrency, you are subject to two different tax events: 

  1. Income taxes upon receiving mining/staking reward payouts 
  2. Capital gains taxes when you dispose of your payout at some future date 

Income taxes

Income received from mining and staking is taxed as ordinary income based on the fair market value of your tokens on the day you received them. 

For example, if you successfully mined 0.25 ETH on July 15th, 2021, you will pay income tax based on the price of Ethereum in dollar terms on that date. The same goes for crypto received from staking rewards.

The tax rate you pay on your mining/staking income is dependent on your income level. Here’s a breakdown of federal income taxes in the 2021-2022 tax year. 

United States Federal Income Tax Brackets

You may be subject to additional state income taxes depending on where you reside. 

Capital gains taxes 

Capital gains or capital losses are incurred in the case of a disposal event. Examples of disposal events include trading your cryptocurrency for fiat, trading your cryptocurrency for other cryptocurrencies, and trading your cryptocurrency for goods and services. 

In this case, how much you incur in capital gains or capital losses depends on how much the price of your tokens has fluctuated since you originally mined them. 

Here’s a simple formula to help you calculate your capital gains or losses: 

Capital Gains/Loss = Fair Market Value at Sale - Cost Basis

Is mining/staking income taxed twice? 

Yes and no. 

After earning a mining or staking reward and recognizing the income associated with it, your cost basis for that mined cryptocurrency becomes the income you recognized. When you dispose of the asset, you’re only incurring capital gains based on the amount that the asset has fluctuated in price since you received it. 

Let’s showcase an example to better illustrate how this works.

Cryptocurrency mining and staking tax reporting

Pro Tip:
You can use cryptocurrency tax software like CryptoTrader.Tax to automatically calculate the fair market value for all of your mined/staked cryptocurrency based on the date and time they were received. Just connect your wallet and let the software do the work!

Mining crypto as a hobby vs. mining crypto as a business 

If you mine cryptocurrency as a hobby, you will include the value of the coins earned as "other income" on line 21 of Form 1040 Schedule 1. Your ability to deduct any expenses associated with the mining is limited—expenses are itemized deductions subject to the 2% rule.

On the other hand, if you run your mining operation as a business entity, you will report the income on Schedule C. In this scenario, you can fully deduct your expenses associated with your business (if you can prove them). The net profit from the business is subject to income tax.

Not sure if your operation should be considered a business or a hobby? See the following article from the IRS explaining the two here.

What tax deductions are available for mining businesses? 

If you mine cryptocurrency through a business entity, you can write off your expenses associated with the business. These deductions are not available for hobby miners. 

Here are some of the expenses that mining businesses can deduct. 

Electricity 

Mining cryptocurrency can lead to high electricity bills. Luckily, mining businesses can deduct these costs as expenses. 

To deduct electricity costs from your tax bill, it’s important to record the amount of electricity that is used exclusively for mining. If you’re using a home office or another property that uses electricity for purposes not related to mining, you should consider using a separate electricity meter to measure usage. 

Equipment 

In most cases, the cost of your mining equipment can be written off as a deduction through Section 179. If the cost of your mining equipment exceeds $2.6 million, you may be able to deduct the cost of your equipment yearly through depreciation

Repairs 

If you’ve made any repairs to your mining equipment, you’ll likely be able to claim a deduction on this in your tax returns. Make sure to keep a record of the cost of these repairs in case of an IRS audit. 

Rented space 

If you’re renting out space to run a cryptocurrency mining operation, you ‘ll likely be able to deduct this cost as a business expense. 

If you're mining cryptocurrency in a home office, you’ll likely be able to claim a deduction based on how much of your home is being exclusively dedicated to your mining operations. 

In case of an IRS audit, you should keep documentation that proves that your home is being used for mining.

Frequently asked questions about crypto mining and staking 

Let’s take a moment to summarize what we’ve discussed and answer a few frequently asked questions about crypto mining and staking. 

Do you have to pay taxes on Bitcoin mining? 

Yes. Not paying taxes on Bitcoin mining is punishable by a fine up to $250,000 and possible jail time. 

Should I report my mining activity as a business or a hobby?

You should consult IRS guidelines and a tax professional to determine which category your mining activity would fall under. 

Will Coinbase send a 1099 form for staking rewards? 

Yes. Coinbase will send a 1099-MISC form if you’ve earned more than $600 in staking rewards. This form is designed to make it easy to report miscellaneous income to the IRS. 

Is staking Ethereum taxable? 

Yes. While the IRS has not released specific guidelines on staking via Ethereum 2.0, staking rewards have historically been considered ordinary income subject to income tax. 

CryptoTrader.Tax for bitcoin and crypto mining

How crypto tax software can help 

Trying to keep track of all the data that comes with mining and trading cryptocurrency can quickly become a time-consuming task. 

CryptoTrader.Tax is used by thousands of cryptocurrency miners to track their mining and staking income. A complete income report is exportable by all users which details income associated from crypto activity. Additionally, CryptoTrader.Tax will automatically build out your form 8949 for your capital gains and losses transactions.

You can take this generated report and give it to your tax professional to file or simply upload it into tax filing software like TurboTax or TaxAct.

For a step-by-step walkthrough of how to bring your cryptocurrency mining or staking transactions into CryptoTrader.Tax, checkout the video below.

This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.

Recently updated on
September 21, 2021
Category:
Crypto Taxes

Recommended For You

Calculate Your
Crypto Taxes

  • No obligations.
  • No credit card needed.
  • Instant tax forms.
Get Started For Free
Tax Calculator