The 101 Guide: Tax On Crypto Mining (The US & India)
02 December 2022taxes
Summary : Cryptocurrency mining is big business. It's no wonder that governments are starting to take notice and are looking for ways to cash in on the craze. One of the most common questions we get here at CRPTM is whether or not crypto mining is subject to taxation. The answer, unfortunately, is not a simple one. Read on as we unveil more about Crypto Mining Taxes in the United States and India.
In this blog:
- Understanding Crypto Mining
- What is Bitcoin Halving?
- Understanding How Crypto Tax Works
- How Is Mined Cryptocurrency Taxed When It's Sold?
- Risks Of Crypto Mining
- The United States: Tax on Crypto Mining
- The United States: Crypto Mining Expenses
- The US: Tax Implications & Reporting Crypto Mining Taxes to the IRS
- India: Tax on Crypto Mining
- India: Tax on Cryptocurrencies: What To Look Out For?
- How does CRPTM help with Crypto Mining Taxes?
If you're looking to earn money through crypto mining, know that you will most likely have to pay taxes on those earnings. It's important to understand exactly what crypto mining is and how it is viewed by the tax authorities before diving in.
Crypto mining is a difficult process, and reporting mined crypto for tax collection may be as well. Mining cryptocurrency creates a slew of tax concerns that must be recorded on separate forms. Whether you mine cryptocurrency as a hobby or a seasoned investor, your capital gains from crypto mining will determine how much tax you would need to pay.
In this blog post, we'll delve deeper into understanding crypto mining and taxes on it.
Understanding Crypto Mining
Crypto mining is the process of verifying and adding cryptocurrency transaction records to a blockchain digital ledger. Miners are rewarded with cryptocurrency for their work verifying and committing transactions to the blockchain.
When you mine cryptocurrency, you are effectively creating new currency units. The amount of currency units you receive as a reward for mining is determined by the protocol of the specific cryptocurrency you are mining. For example, as of April 2022, a Bitcoin miner will receive 6.25 BTC for each block mined successfully.
What is Bitcoin Halving?
Some cryptocurrencies, like Bitcoin, have a finite supply. This means that there will only ever be 21 million Bitcoins in existence. As more Bitcoins are mined, the rewards for each block mined will decrease- this is known as Bitcoin halving.
DID YOU KNOW?
- 2012: First Bitcoin Halving occurred when the reward for each block mined was halved from 50 BTC to 25 BTC.
- 2016: Second Bitcoin Halving occurred and reduced the reward to 12.5 BTC.
- 2020: Third and most recent Bitcoin halving occurred and cut the reward to 6.25 BTC.
- 2024: Next Bitcoin halving is expected in April 2024 where rewards will be reduced to 3.125 BTC.
The Bitcoin halving is an event that occurs every four years and halves the block reward for miners. As the supply of new Bitcoins decreases, the demand for Bitcoin increases, leading to higher prices.
Understanding How Crypto Tax Works
Crypto is taxed- this is further determined by the kind of cryptocurrency you are mining, the size of your crypto-mining operations, and the amount you make from crypto mining.
Each tax office has a distinct perspective on crypto mining taxes. In most countries, crypto mining is taxed. Either Income Tax or Capital Gains Tax - or, in some cases, both - are required. This is contingent on the scale of your cryptocurrency operations.
When you mine crypto, you're only taxed on gains when you sell them, spend them, trade them, or give them away. However, if your crypto mining operations are more commercial in nature because of the scale you're mining at and the profits you're making - as is the case with business-like activities - then when you receive those mined coins, you'll pay Income Tax on them.
While there is some good news for miners who appear to be operating as a company, there's also some bad. You'll pay income tax, but you'll frequently be able to deduct mining-related expenses such as equipment, electricity costs, and more.
Cryptocurrencies are subject to capital gains tax rules, for better or worse. The IRS considers all cryptocurrencies to be capital assets, and you must pay taxes when they're sold at a profit. This is precisely what happens when you sell more conventional assets like stocks or funds for a profit.
Depending on how long you've held your crypto, you'll be responsible for paying capital gain taxes. If you’ve held it for 36 months or less, your profit is taxed at a short-term capital gains rate.
However, if it's been at least over 36 months since you received your coins, you may qualify for a long-term capital gains rate that is lower than most income taxes, depending on your taxable income. If you sell your crypto investment at a loss, you are able to claim a capital loss that you may use to offset other income taxes.
How Is Mined Cryptocurrency Taxed When It's Sold?
It is taxed as capital gains when it's sold. If you hold onto your mined cryptocurrency for more than a year, you'll be taxed at the long-term capital gains rate. If you hold onto your mined cryptocurrency for less than a year, you'll be taxed at the short-term capital gains rate.
Long-term capital gains are earnings derived from assets that have been owned for more than a year before being disposed of. Long-term capital gain rates vary by taxable income level, with rates ranging from 0%, 15%, or 20%. Most individuals who report long-term capital gains pay a rate of 15% or less in taxes.
Risks Of Crypto Mining
Crypto mining is a risky endeavor. The value of cryptocurrency can swing wildly, and mining costs, such as electricity costs, can also fluctuate. If the price of the cryptocurrency you're mining falls below the cost of mining it, you'll end up losing money.
Crypto mining is also a competitive business. As more people begin mining cryptocurrency, the difficulty of mining increases. This means you'll need to invest in more powerful and expensive equipment to keep up with the competition.
Now, let's look at how the Tax offices view mining in the United States and India.
The United States: Tax on Crypto Mining
The IRS has been rather stern on the subject of the crypto mining tax. You'll pay Income Tax on new coins you earn via mining, no matter how big your operation is.
You will pay income tax when you mine new coins
- You will be taxed on the fair market value of the coin in USD on the day you received it, based on your Federal and State Income Tax rates.
You will pay capital gains tax when you sell coins
- When you sell, spend, or exchange mined coins, you'll also be responsible for Capital Gains Tax. On the day you acquired the coin, use its fair market value as your cost basis.
If you operate a business and your crypto mining activities are considered to be a trade or profession, then you will have to pay Self-Employment Tax in order to cover social security and Medicare payments.
Many US crypto miners have chosen to establish their mining operation as a company or set up a solo proprietorship due to the IRS's hard position on crypto mining.
The United States: Crypto Mining Expenses
You can deduct your mining costs as business expenses once you establish a mining operation as a company. Most cryptocurrency miners are aware that operating a lucrative mining operation is both costly and difficult. However, considering it as a business may help you reduce your tax bill. You can include the following business mining expenditures:
- Expenses on equipment, such as a mining rig.
- Equipment repairing costs.
- Costs of electricity.
- Deduction on home office or office space, if it's applicable.
Always consult with a competent tax attorney about the best method to approach your mining activities from a tax standpoint.
The United States: Tax Implications & Reporting Crypto Mining Taxes to the IRS
The IRS requires you to disclose your crypto mining earnings on Form 1040 as part of your annual tax return. If you're self-employed or operate a mining business, you report your earnings from mining on Form Schedule 1 (1040) or Form Schedule C (1040).
Difference between Schedule 1 & Schedule C
Schedule 1 is filed to report crypto mining as other income.
Schedule C is filed to report crypto mining as a business.
You'll report any capital gains from selling, trading or spending mined coins on Schedule D (1040), as well as Form 8949.
Furthermore, the tax implications of crypto mining depend on a number of factors, including the country you're in and the type of cryptocurrency you're mining.
In the United States, the IRS views cryptocurrency as property. This means that any income you earn from mining cryptocurrency is subject to capital gains taxes.
If you mine cryptocurrency as a hobby, your profits are subject to capital gains taxes. You can deduct your mining expenses up to the amount of income you earned from mining.
If you mine cryptocurrency as a business, your profits are subject to self-employment taxes.
Deductions are available to offset the taxes you owe on your crypto mining profits. If you're mining cryptocurrency as a business, you can deduct the cost of your mining equipment and electricity costs.
India: Tax on Crypto Mining
The cost incurred on infrastructure to mine virtual digital assets won’t be treated as the cost to acquire it. This will be considered in the same nature as capital expenses incurred, and hence, is not allowed as a “deduction” as per the Income Tax Act provisions.
As per the Indian Union Budget 2022
The mining infrastructure cost incurred while mining crypto assets will not be considered as a purchase expense.
How does CRPTM help with Crypto Mining Taxes?
If you're a crypto miner looking for an easy way to keep track of and report your mining taxes, CRPTM is your Crypto Buddy to assist.
You can integrate blockchains like BTC, BCH, and LTC with CRPTM via API to import all of your mining transactions into a single platform.
When your crypto mining transactions are synced, CRPTM will include them in your tax summary automatically. If you live in a jurisdiction where bitcoin or other cryptocurrency income is taxed as such and subject to income taxes, simply use the CRPTM tax calculator, generate your EOFY tax report in just under a few minutes and you are all set for submission.
Now that you know how cryptocurrency is mined and taxed, you can start thinking about whether or not crypto mining is right for you. Crypto mining can be a profitable endeavor but it's also a risky one. Be sure to do your research and understand the risks before you start mining.
And don’t forget to share this blog with your friends and followers – knowledge is power.