Similarly, if a taxpayer performs mining activities as an employee, payments made in cryptocurrency are treated as wages subject to federal income tax withholding of Social Security/Medicare and unemployment taxes. Additionally, if a taxpayer’s mining activities constitute a trade or business or the taxpayer undertakes such activities as an independent contractor, the reward tokens/virtual currency payments are deemed to be self-employment income and accordingly, subject to self-employment taxes. Under the Notice, a miner will recognize gross income upon receipt of the reward tokens in an amount equal to the fair market value of the coins at the time of receipt. With respect to (1), the IRS has issued Notice 2014-21 which directly addresses the tax implications of crypto mining. Tax Implications of MiningĬrypto miners will generally face tax consequences (1) when they are rewarded with cryptocurrency for performing mining activities, and (2) when they sell or exchange the reward tokens. Thus, mining has the effect of putting more of the network’s cryptocurrency into circulation while ensuring the integrity of the network itself. Miners are rewarded with the network’s cryptocurrency for solving problems and adding blocks to the blockchain. Under a proof-of-work consensus mechanism, miners compete to solve complex mathematical problems in order to validate and add a block of transactions to the ledger. To prevent double-spending, cryptocurrency networks rely on a consensus mechanism known as Proof-of-Work. The absence of a financial middleman can, however, result in a “double-spending” problem whereby a cryptocurrency is spent more than once. Cryptocurrencies are powered by blockchain technology, a decentralized public ledger of transactions that are grouped into “blocks” and that do not rely on a centralized authority to police such transactions. Miners play a critical role in securing cryptocurrency networks, with Bitcoin being the most prominent example. Taxpayers engaged in such activities should generally be aware of how mining should be taxed, especially in light of increased IRS attention to cryptocurrencies. In this posting, we will provide a general overview of the tax implications of crypto mining, including the taxation of reward tokens and tax reporting considerations. But how is mining taxed? Are the tokens received by taxpayers as rewards for their mining activities deemed to be capital or ordinary gain?įortunately, the IRS has released detailed guidance on this front in the form of a notice it originally issued in 2014, but which the Service updated this year amidst a skyrocketing crypto market. It is no surprise then that mining has been subject to IRS scrutiny and enforcement. Amid the crypto boom, mining has become an extremely lucrative venture for many and critical to maintaining decentralized cryptocurrency networks.
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