Tax Guide to Cryptocurrencies – Part 2: Mining
Author: Victoria Leca, Tax Accountant at Delap
For the second part of our blog series on cryptocurrencies, we will discuss revenue recognition implications around mining currencies. An important feature that has made Bitcoin so popular is the opportunity to mine the coin yourself. Any computer user with the right hardware and software can connect to the decentralized Bitcoin ledger, solve a few problems, and in exchange, be issued a certain number of bitcoins. This system allows the public at large, in a very egalitarian manner, to become a part of the project. Mining is a crucial part of Bitcoin and it ensures fairness while keeping the Bitcoin network stable, safe, and secure.
Tax implications of mining cryptocurrencies
Bitcoin is not the only cryptocurrency that can be mined. The more Bitcoins are in circulation, the harder it is to mine for new ones, so users have turned their attention to other cryptocurrencies such as Ether. When users successfully mine a cryptocurrency coin, they realize gross income upon receipt of the virtual currency. That means they must include the fair market value of the virtual currency on the date of receipt as gross income on their tax return. This includes individuals who mine cryptocurrencies as a trade or business. In addition, any net earnings in a trade or business (which would be the income obtained through mining less any allowable deductions) would be considered self-employment income and be subject to self-employment tax.
Taxpayers should maintain records of any mined currency and determine the fair value as of the date of receipt, to report taxable income and calculate the appropriate tax.
Selling mined cryptocurrencies
If a taxpayer decides to sell their mined cryptocurrency, the gains or losses realized on the sale will generally be treated as a capital transaction. The value of the mined currency at the date of receipt will become the initial basis in the asset. Any gain or loss from exchanging the cryptocurrency for another currency, for cash, or for an asset will create a taxable event that will need to be reported on the tax return.
Cryptocurrencies that can’t be mined
Not all cryptocurrencies can be mined. Some currencies, such as Ripple (XRP), can only be purchased on specific exchanges. These currencies would only be reported on the tax return in the event of a sale, when the buyer will have to realize gains or losses.
If you would like to find out how these regulations apply to you, please reach out to our team today at (503) 697-4118. We are here to assist you with reporting and maintaining proper records of your cryptocurrency transactions.