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Author Topic: Can you claim mining equipment and electricty as a tax write-off? (US question)  (Read 884 times)
HashFace
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August 23, 2017, 05:40:38 PM
 #1

Ive started mining as a hobby.  It got me wondering if I can offset some of my taxable profits by claiming electity use and dedicated mining equipment. 

Anyone have expericence here?

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August 23, 2017, 05:52:40 PM
 #2

would also like to know this...not sure what the laws are if you setup business after already purchasing and using though...
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August 23, 2017, 06:03:45 PM
 #3

If you form a business of some type... and the equipment is SOLELY used for the business.... then it would be hardware that you can depreciate just like any other business does. 
That's why rich people form lame side businesses and slap the sticker of it on their Range Rovers. They get to depreciate the cost of their vehicle now on their taxes.

(Disclaimer:  Get a CPA to handle this kind of stuff)
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August 23, 2017, 06:18:40 PM
 #4

Yeah, I do have a CPA, just wondering if there it's worth tracking and bringing up.  Forming an LLC is a good idea if you are a serious miner, but for me, it's a hobby.

I did find some info at IRS.gov.  Looks like can deduct hobby expenses, if you are also claiming income from a productive hobby.

https://www.irs.gov/uac/newsroom/five-basic-tax-tips-about-hobbies

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August 23, 2017, 06:22:39 PM
 #5

Yes absolutely. I have *everything* I have purchased or spent any money on tracked in a spreadsheet. When it comes time to file I believe I will have a tax document from Coinbase. When that happens I will be writing everything down into my "hobby" business entry (I believe it is called Schedule C) and those expenses will offset my capital gains. My goal will be of course to either show A) a loss or B) just break even. Never show a gain  Grin

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August 23, 2017, 07:01:36 PM
 #6

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.pdf
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August 25, 2017, 05:38:23 PM
 #7

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.pdf

ok 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.
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August 25, 2017, 09:32:17 PM
 #8


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.

 1) safer, but not an absolute requirement. There's a supplimental form you can file for "income and loss from a private business" or some such, but the IRS tends to get picky about "auditing" folks that go that route and often disallows deductions if they decide you're a "hobby" not a "business".
     It's MUCH easier to justify "business" expenses when you have a formally set up business, and the IRS is a lot less likely to try to disallow business expenses in that case.

 2) Iffy, I'd DEFINITELY consult a tax professional about that sort of thing.

 3) grey area there, the "count it once it's in your wallet or in your exchange wallet" is probably the safest option, but in theory you COULD try to claim it as an investment then only count it as income once you convert it to cash (or spend it on something) like on a stock.

 4) if you SELL your miners, you can count them as INVENTORY - which gives you much better options to deal with their value dropping over time vs the crazy-long "depreciation" schedual the IRS allows for computer equipment.

 5) purchase cost - if you count them as equipment, you treat it like any other equipment used in the business. If you treat them as inventory, it's treated as inventory of product for sale.

 6) + 7) seems basically correct. Less than a year it's taxed as a "short term gain" at the higher rate for those gains, more than a year it's a "long term gain" at the lower rate for those.

 9) depends on the size of the business, and what kind of profits you're getting taxed on.

 10) ABSOLUTELY. And optimally keep PAPER BACKUPS as well, some IRS agents hate having to deal with anything else and I've encountered at least one that didn't believe ANYTHING that wasn't "on paper".

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August 25, 2017, 09:39:56 PM
 #9

You really should consult with your CPA on this, but I am a CPA so I can give you some advice.

When you are talking about "forming" a business, I am not sure you have the right idea about it.  You can have a sole proprietorship, which does not actually require "forming" anything, but is basically stating you now have a sole proprietorship, and take depreciation on your equipment and deduct electricity costs.  (That is at the federal level, state level may be different.  In KS I do not need to file anything with the state, but your state may be different).

Your mining earnings would be treated as ordinary income and could be offset by depreciation of equipment and any other costs associated with running the equipment.  But as previously stated, you would owe self employment tax, which can be a headache and expensive.  It is still better to go this route though.

Remember though, if you depreciate and then sell the equipment, you will owe gains on the sale of the equipment.  Keep very thorough spreadsheets of ALL activity is my best advice.

I have a few spreadsheets set up for my various activities.  I suppose for a fee I would be happy to provide accounting work relating to mining for individuals.


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August 26, 2017, 12:03:12 AM
 #10

You really should consult with your CPA on this, but I am a CPA so I can give you some advice.

When you are talking about "forming" a business, I am not sure you have the right idea about it.  You can have a sole proprietorship, which does not actually require "forming" anything, but is basically stating you now have a sole proprietorship, and take depreciation on your equipment and deduct electricity costs.  (That is at the federal level, state level may be different.  In KS I do not need to file anything with the state, but your state may be different).

Your mining earnings would be treated as ordinary income and could be offset by depreciation of equipment and any other costs associated with running the equipment.  But as previously stated, you would owe self employment tax, which can be a headache and expensive.  It is still better to go this route though.

Remember though, if you depreciate and then sell the equipment, you will owe gains on the sale of the equipment.  Keep very thorough spreadsheets of ALL activity is my best advice.

I have a few spreadsheets set up for my various activities.  I suppose for a fee I would be happy to provide accounting work relating to mining for individuals.

This matches up what our research and tax advice has been. Unless you get really big, ie you need to hire employees. It seems best to file as self employed business, just like a handyman or small scale general contractor might do. It sucks paying the self employment taxes (our wonderful government really encourages people to try to better their life eh?) but I think you could get royally screwed by the IRS if you don't go that route.  Check with a local tax pro that will know or be able to find out your local and state laws that may differ from what others on these forums have at the state/city/town level.

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August 26, 2017, 01:55:35 AM
 #11

You really should consult with your CPA on this, but I am a CPA so I can give you some advice.

When you are talking about "forming" a business, I am not sure you have the right idea about it.  You can have a sole proprietorship, which does not actually require "forming" anything, but is basically stating you now have a sole proprietorship, and take depreciation on your equipment and deduct electricity costs.  (That is at the federal level, state level may be different.  In KS I do not need to file anything with the state, but your state may be different).

Your mining earnings would be treated as ordinary income and could be offset by depreciation of equipment and any other costs associated with running the equipment.  But as previously stated, you would owe self employment tax, which can be a headache and expensive.  It is still better to go this route though.

Remember though, if you depreciate and then sell the equipment, you will owe gains on the sale of the equipment.  Keep very thorough spreadsheets of ALL activity is my best advice.

I have a few spreadsheets set up for my various activities.  I suppose for a fee I would be happy to provide accounting work relating to mining for individuals.

This matches up what our research and tax advice has been. Unless you get really big, ie you need to hire employees. It seems best to file as self employed business, just like a handyman or small scale general contractor might do. It sucks paying the self employment taxes (our wonderful government really encourages people to try to better their life eh?) but I think you could get royally screwed by the IRS if you don't go that route.  Check with a local tax pro that will know or be able to find out your local and state laws that may differ from what others on these forums have at the state/city/town level.

Def do not get caught skirting self employment tax, they do not like that and come down very harsh if caught.


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August 26, 2017, 05:05:30 AM
 #12

very useful information! thanks!
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August 26, 2017, 07:58:30 AM
 #13

This might help you all it has a fee for the year like turbo tax but it works great ...

 
https://bitcoin.tax/home#trading
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August 26, 2017, 04:24:26 PM
 #14

So why isn't trading ETH for ETC a like-kind exchange?  Why is it a taxable event?
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August 26, 2017, 08:47:51 PM
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When you are talking about "forming" a business, I am not sure you have the right idea about it.  You can have a sole proprietorship, which does not actually require "forming" anything, but is basically stating you now have a sole proprietorship, and take depreciation on your equipment and deduct electricity costs.  (That is at the federal level, state level may be different.  In KS I do not need to file anything with the state, but your state may be different).


 You still have to register as a sole proprietorship, usually with your state's Department of State, in every state I've operated a business in, before you can claim to be a business for tax purposes.
 That might vary with the state though, I've only run businesses in 4 states at this point (CA, IN, IA, WA).

 Many municipalities require you to be licensed as a business as well, but that varies a LOT.
 I've also seen a couple of counties that required it, but that was only in "unincorporated" parts of the county and didn't apply if you were in a municipality.

 Feds require you to "operate as a business" in my experience, they generally accept that if you keep seperate accounting of the mining operation income and expenses AND are licensed per your state/local legal requirements that you are a business for that purpose - though they sometimes STILL apply the "you need to demonstrate you will be making a profit at it somewhere in a 5 year period" test anyway.

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