Cryptocurrency is an invaluable resource in the 21st century. It has redefined the entire decentralized finance and initiated a new trend in the financial sector. Crypto mining is the way new coins are launched into circulation. Technically, mining is the process by which official crypto transactions are entered into the blockchain network.
According to the compliance of the revenue systems, cryptocurrency is a taxable property or asset right now. Any income and capital gains from cryptocurrency transactions are taxable. The latest quest is whether crypto mining is taxable and how it works. This article shows the basics of crypto mining and its tax and can be an effective reference material for hobby miners and professional miners.
What Is Crypto Mining?
Crypto mining is the process of yielding Bitcoin, litecoin and other cryptocurrencies and verifying the latest blockchain transactions. Bitcoins and other proof-of-work cryptocurrencies are generated via this process. The mining process consists of sophisticated computers solving complex mathematical problems. The crypto miners receive new coins and tokens as an incentive for their effort in validating the transactions and securing the networks.
Cryptomining is an influential process in the cryptocurrency sphere and it has significance beyond releasing new coins into circulation. It enhances the security of the blockchain network and enables cryptocurrencies to function as an advanced peer-to-peer decentralized network without the assistance and administration of a third party.
Crypto Mining And Taxes: An Understanding
According to the tax regulations of the IRS, HMRC, and other revenue services, cryptocurrencies and their transactions are considered taxable events. These revenue services consider cryptocurrency mining as a taxable activity. The miners are obliged to report their crypto-mining rewards in their tax returns and pay applicable taxes.
According to the IRS compliances, crypto mining can create two taxable events. Income tax when you get your mining rewards and capital gains tax when you sell your mining rewards and attain a capital gain are the two taxable scenarios that are applicable in crypto mining. Let us take a closer look at the two scenarios and analyze how it works under the IRS and US tax laws.
Income Tax On Crypto Mining
When you mine and attain rewards from that process, The Internal Revenue Service (IRS) considers it as an income and US taxpayers need to pay income tax for the acquired rewards. You will need to pay your regular income tax rate based on the fair market value of your acquired mining rewards on the day you receive them. This fair market value will be your ‘cost basis’. This cost basis will be required to calculate your capital gains and losses once you sell your mining rewards. The percentage of your tax will be based on how much you earn from the mining process. As per the US tax law, you will need to pay income tax of up to 37% upon mining rewards.
Capital Gains Tax On crypto Mining
You will either sell, swap, or spend your mining rewards at a particular point in your life. Then you will have to pay capital gains tax due to this transaction. You need to calculate your capital gain and loss on a cost basis.
Capital gain/loss = Sale price - cost basis of your mining rewards
If you have gain from the sales, then you have to pay tax on the gain. If you sold your rewards for a loss, then you can use this loss to alleviate your tax bill. The US taxpayers need to pay a capital gain tax of up to 20% on any gain from selling their mining rewards.
According to the HMRC compliances and regulations, UK taxpayers will have to pay their crypto mining taxes based on several factors like the degree of activity, organization, commerciality, and risk. UK crypto mining tax separates miners into two categories, hobby miners and full-fledged businesses. Hobby miners will have to pay income tax and capital gains tax like the US taxpayers. The mining incomes of business miners will be added to their trading profits and they are obliged to pay income tax for this. Any rewards or fees attained from mining or staking will be added to taxable income. The hobbyists and professional miners should consult an expert accountant to eradicate their doubts regarding mining taxes, so they will not be confused once revenue authorities evaluate their mining taxes.
The Tax Deductions On Crypto Mining
You will be able to deduct your mining costs as business expenses if you establish your mining operation as a business. Treating your mining operations as businesses can dismiss some of the expenses from four tax bills.
- Equipment costs (Section 179)
- Repairs and maintenance cost
- Electricity costs
- Office space or rented space
- Expenses to build a mining farm
These mining expenses can write off some expenses from the tax returns and eventually, you will get the tax deduction. You can consult an authentic and qualified accountant or tax expert to acquire the best possible pieces of advice. This will be the ideal solution to get rid of the ambiguities and complexities of the crypto mining tax.
The Bottom Line
Crypto mining is an inevitable process in the crypto sphere. It helps the network verify and validate the transactions and maintain a secure environment. The revenue service considers crypto mining as a taxable activity, so the miners are obliged to pay taxes to the government. If you are a crypto miner and an active digital asset trader, pay your taxes without hesitation, because denying it can cause you enough penalties and legal suits.
