Not all crypto is taxed the same way. Each category of cryptocurrency income has its own rules that must be followed. These different types of blockchain income are all taxed differently.
And crypto mining is probably one of the “most different” of the bunch.
Mining Compared to Other Crypto Income
Most other types of cryptocurrency profits are (effectively at least) treated as investment income: crypto trading, staking income, loan interest on deposits, etc.
And like regular investments, some of the expenses you are allowed to use to offset against your investment income can be limited.
With mining, you are allowed to deduct a wider array of expenses than with the other categories of crypto income. But this doesn’t always mean you’ll be paying less in taxes.
Why?
Because crypto mining is considered business income. So while this allows for a broader range of expenses to offset against revenues, there are two major downsides:
- Any profits are subject to self-employment tax
- The profits are taxed as ordinary income
Self-employment tax (the employer and employee halves of Social Security and Medicare) is 15.3%. That’s the surcharge you’ll pay on every dollar of profits.
In addition, business income is considered ordinary income. This means that it is taxed at your regular income tax rates and is not eligible for long-term capital gains or qualified dividends treatment the way some other investments would be.
More Flexibility With Mining Income
These factors (and their associated costs) make it all the more important to ensure you are planning properly throughout the year. And that planning includes making sure you are not missing out on any potential expenses.
Just as with a regular business, there are strategies on capturing and allocating your expenses that can significantly reduce your profits and thereby reduce your tax hit. In some instances, it may be advantageous to set up an entity to run your mining operations through and make a corporate election on it.
But all of this is dependent on your unique circumstances. Make sure you are planning throughout the year with a “crypto-literate” CPA.
Your mining income can be effectively tax free. Or it can be the most expensive income you earn all year. It largely comes down to planning.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
