What do you think about when you hear mining? Do you think of the diamond mines in Australia, or mining for precious metals? Does an image of Derek Zoolander in the coal mine flash into your memory? It certainly does for me...
Photo by David McBee from Pexels
Thankfully, we don't have to look far underground to find miners for cyrptocurrency. Per the IRS guidelines, a cryptocurrency miner is a person or group that uses computer resources to validate...transactions and maintain the public...transaction ledger. These miners are not limited to just Bitcoin, all other cryptocurrencies (Ethereum, Litecoin, Atom, etc.) have miners.
For additional information about what is considered Taxable and Nontaxable Income, see Publication 525.
Miners, when they successfully validate a blockchain recognize their fees collected, or mined, as the fair market value as of the date of receipt, including it in gross income. Along
Photo by Vlad Chețan from Pexels
the line of recognizing income during the process of mining, the mining itself is considered an activity of self-employment, and is therefore subject to self-employment taxes. Thankfully, though, miners are able to deduct allowable expenses that are ordinary and necessary- just like other self-employment deductions. Have to buy a crazy fast super-computer to solve the algorithms in a timely manner? I'd say that's not necessarily fully deductible in the year of purchase; but it definitely qualifies as a depreciable asset; and may also benefit from a § 179 special depreciation deduction.
For more information about the self-employment tax, please review Chapter 10 of Publication 334, Tax Guide for Small Business.
For more information about Business Expenses, please review Publication 535.
In the next discussion, we will review how cryptocurrencies are considered income and wages for independent contractors and employees.
Until next time.
- Tom