From the IRS:
Q-9: Is an individual who “mines” virtual currency as a trade or business subject
to self-employment tax on the income derived from those activities?A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the
“mining” activity is not undertaken by the taxpayer as an employee, the net earnings
from self-employment (generally, gross income derived from carrying on a trade or
business less allowable deductions) resulting from those activities constitute selfemployment
income and are subject to the self-employment tax. See Chapter 10 of
Publication 334, Tax Guide for Small Business, for more information on selfemployment
tax and Publication 535, Business Expenses, for more information on
determining whether expenses are from a business activity carried on to make a profit.
https://www.irs.gov/pub/irs-drop/n-14-21.pdfok I read that whole document. I am not a tax professional, but this is how I understand it, and PLEASE correct me if i'm wrong anywhere:
1) I *DO* need to form a business, because if I don't then all of this is treated as a personal expensive and thus, not deductible. and you still gotta pay taxes on mining rewards even if you don't form any legal entity.
2) costs incurred prior to the actual formation are seen as startup costs and allowed for deductions.
3) On date of receipt of these mining rewards in cryptocurrency (I guess this is when I transfer it from the pool to my wallet, because I don't know how the hell you'd do this for the fractions of shares in pplns pools), this is taxable as gross-income. not sure if you use the highest value for that day, lowest value for that day, or probably more accurately the last trade at that exact timestamp which I guess is going to vary depending on which exchange you look at...
4) you can apply deductions to this income. aka expenses related to a home office (% of rent, utilities, repairs, insurance, mortgage interest), depreciation expense on assets (e.g. computers, office equipment, tools, furniture). also deductable is % of credit card interest, if you used it to buy your equipment. basically any cost you incur in order for this to work is an operational expense. or more formally stuff like this:
"To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."5) I still dont know how to deduct the purchase cost of the equipment itself, whether the full purchase price is deductible, and whether or not the hardware is now an asset that is depreciated every year for 5 or 15 years or whatever those rules are. in other words i think its an amortizable deduction. like i dont think you can claim a huge $20k deduction up front, but rather its split up over some amount of years. I do not understand this part very well and how it affects depreciation value and if you can only claim one or the other or both.
there some difference here that i dont fully understand yet. "capital expenses" is a bit different than deductions somehow. I think startup costs and assets are capital expenses vs the operational costs like electricity. and these are amortized over years instead of all up front. in any case all of this is deductible in some form.
6) when I "sell" the cryptocurrency to exchange it into USD, this is treated like stocks, and if it gained from the VALUE it was when you received it (see #3 above), that difference is taxable as capital gains, and if it went down from that value then its a capital loss. also here if I recall right, if you sell it less than a year of having it, its taxed higher.
7) VERY IMPORTANT. regarding #6 above, if you sell the cryptocurrency less than 1 year after acquiring it, you're taxed under short-term capital gains which is HIGHER, and the % matches whatever your bracket is you fall under. lets say your married filing joint and make $200k, then short term capital gains tax is 25% of your profit. if you HODL and sold > 1 year, this drops to 15%.
8 ) like-kind exchanges don't apply to cryptocurrencies. so if I exchange ETH into BTC, this is also subject to capital gains/loss. so if i made money on ETH, gotta report it as a gain, and if I lost some then its a loss. Now when I exchange it back into ETH, once again if BTC went up its a capital gain, and if BTC went down its a capital loss. and again like #7 if i'm just flipping this back and forth every other day or week or month even, its all short-term capital gains...
9) with a business you're supposed to pay taxes quarterly, not yearly, but for startups the quarterly filing is waived for the first year. so after a year, i file everything up til then, and after that then i have to pay quarterly. also something about half of self-employment tax you pay is also a deduction, so dont forget that.
10) keep detailed records of EVERYTHING. because the IRS is probably going to scrutinize you when you deduct all this stuff computers and electricity etc, especially since its dealing with cryptocurrencies... excel is your friend. I use google sheets lol.
