I am a crypto enthusiast, supporter, miner, and investor so i thought it would be important that i share useful information for anyone who is currently mining crypto currency and especially for those mining if California where i am based out of. Some background on my operation which i am going to be using an example for this blog post. I’ve been currently been mining for ethereum for this year and have been monitoring the market and gathering as much info as possible so that I am in compliance with current Federal and State tax law.
Mining is a very interesting hobby that I’ve taken on once i found out that i could make money from computing power that i have not been utilizing. For many of you who have high end gaming and production computers it’s almost a no brainer especially when i am not able to even use my computers. These miners are just servers which are utilized as databases. As a reward for running software and monitoring the servers miners are rewarded with a crypto currency. I am not going to get into the specifics, but there are plenty of tokens out there and mining operations which use them as payouts. This is all considered taxable income at the time when it was received for the value when received.
Crypto mining shares are taxable income
Any currency that you receive is taxable at the time when received so this means that we all have to pay tax on this income and it’s treated as ordinary income. For those of us who aren’t incorporated this means that the income is subject to self employment tax. This is because those who aren’t a corporation will have to report it on their schedule C in their individual return. You should also do your own research to see if you have to register with your city as a business. Since my rig is located in Studio City, California i will have to register with the City of Los Angeles for a license to report my gross income for the year. The license is free if my income is less then $150,000, but it’s still another form that i have to keep track of and file on a yearly basis.
This comes out to be quite expensive when we also consider the California franchise tax. If you mine 10k in a calendar year and fall in the new 24% Federal and the 8.3% state rate and we also add the 15.3% self employment tax it comes out to 47.6% on each time that your wallet receives a reward for your mining. The good news is that your tax is based on the net and with some accelerated depreciation we’ll be able to expense out all if not most of the equipment in the first year, but after that it’ll be horrible for those who aren’t a corporation. The corporations aren’t subject to that 15.3% self employment tax. So this would definitely be a consideration when decide if whether or not it’s worth the incorporation cost.
Tax planning and preparation
Now that we know how the crypto is taxed we can make smart decisions on how to report and treat our hard earned mining return. For the first year I wouldn’t really worry much since the equipment costs should cover the costs especially with the recent dips in price. The planning is now really based on what you plan on doing with your crypto. If it’s sold and converted in a market exchange you will also have to pay taxes on any profits, but if you decide to hold then you should definitely consider setting up a corporation to explore small business tax benefits.
I am been following this subject matter closely and hopefully there is more clarification on its classification. It’s important to download your transaction through your wallet provider whenever possible and save it for your records for audit purposes. Business owners should also add their wallet to their balance sheet if using software to help keep track of the transactions and to meet proper practice requirements.