Tax considerations for home-based encryption

So you have your own mining installations installed at home. They are tearing apart and accumulating a good supply of cryptocurrency.

However, there is one thing you must consider … and this is taxation

More specifically, how do you manage the tax implications of profits deriving from the extraction of a digital asset? How do you structure your tax bill and make it more efficient?

In this post we will examine the general tax implications for cryptocurrency miners. While the specific tax law will be that of the IRS, many of the same principles could be established in your country of origin.

As the tax man sees Crypto

Before you can see how your domestic encryption operation can be taxed, we must first go through the general tax implications of cryptocurrencies and the appreciation of capital over them.

As you know, IRS has created a broad framework for cryptocurrencies in 2014. The particular directive was that of the Notice 2014-21, Q-9 which dealt with how the IRS would apply the tax code existing to the new realm of digital currencies.

For the purposes of taxation, cryptocurrencies can be seen as properties. So, if you earn cryptocurrency from any effort, the earnings are subject to income tax. If the cryptocurrency were to appreciate in value, it would be subject to capital gains tax.

If you are bypassing a cryptocurrency at home, you will be subject to income tax on these particular earnings.

"Taxable event"

If you have already dealt with the taxation of cryptocurrency in the realm of trading, then you will have found the concept of "taxable event". For example, when you sell your cryptocurrency for Fiat and you have made a profit that triggered a taxable event.

So, how does it work for mining?

Well, simply the taxable event for income derived from mining is when the real coins will hit the blockchain. The amount that will be set for those gains is the price that the cryptocurrency was worth at the time it appeared on the blockchain.

This is also the price that will be used as a parameter to calculate capital gains or losses for tax purposes as we move forward. The IRS actually included a useful example of this:

[A]ssume 1 bitcoin mines in 2013. On the day it was mined, the bitcoin market price was $ 1,000. You have $ 1,000 of taxable income in 2013. In the future, your base in bitcoin is $ 1,000. If you later sell the bitcoin for $ 1,200, you have a taxable gain of $ 1,200 – $ 1,000 = $ 200

In terms of the price that is applied in the example above, the definition of general tax of it is the "fair market" price. This is more freely defined as the price that the cryptocurrency will recover on the open market if it were converted into fiat currency.

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Of course, this is not so simple. Anyone who knows how volatile and illiquid some cryptocurrencies can appreciate the difficulty in assigning an exact price. At what price of cryptocurrency exchange do we refer? Is it an end-of-day price or the price at the exact time corresponding to the block's timestamp?

These are the most in-depth questions we hope the IRS will clarify in further directives.

Hobby or business

Whether you are conducting your mining operations as a hobby or as a business, it will have important impacts on your taxation. This is because it will define whether you are earning cryptocurrency as a salary or as a self-employed person.

If you say that your mining business is a hobby, the gains you get from mining will be classified as "salaries". When your income is classified as a salary, it means that you will only pay half the tax on self-employment.

However, if you are claiming that your mining business is a business, then you will have to pay the entire tax on self-employment. Starting from the fiscal year of 2018, the tax rate for self-employment stood at 15%. While this sounds less optimistic in theory, performing operations like a business means you'll have more options for detailed deductions.

In order for you to state that the mining operation is a business, you must meet certain criteria in the eyes of the IRS. More specifically, it must be done in a manner consistent with the specific purpose of generating a profit. If it's more in an on-off way, it's most likely a hobby.

Regardless of whether it is a hobby or a business, you are subject to self-employment income tax if your mining income is more than $ 400 in a particular fiscal year.

What about deductions?

Of course we all know that there are significant costs involved in mini cryptocurrencies. Fortunately for you, these expenses can be considered as a cost of doing business and are therefore tax-deductible.

So, what expenses can then be considered tax-deductible?

Well, the IRS tax code claims that any expenses necessary for the business of the company can be deducted for tax purposes. This typically can be applied to most of the fixed and operational costs of performing a mining operation that includes some of the following:

• Capex on hardware and secure storage of coins
• Broadband connection
• electricity
• Rates of the mining pool
• Administrative expenses
• Accounting expenses
• Business trip

These are broad definitions of some of the expenses that could be considered necessary for the execution of an operation. However, a certain degree of caution is required in requesting such expenses in the tax returns.

For example, it is not possible to allocate the entire electricity bill to the cost of running its own mining platforms. If you are digging from home, part of these costs will be related to your general home use. The IRS will undoubtedly be aware of this and will demand a more concrete break.

You could then consider installing a separate meter that will follow the electricity used exclusively by your mining rigs. This is probably a good investment anyway as it will allow you to monitor excessive use for performance purposes.

The same can be said for "Business Travel" above. If you attend a conference or event related to mining, this could be considered an expense applicable to the operation. You will have to make that judgment personally or consult your accountant.

Deduction limits

However, it is important to note that the extent to which these expenses can be deducted depends on how the mining operation was classified. If you have classified it as a hobby, there are limits to the deductions you can apply for.

If your mining business is a hobby, you can only deduct expenses that exceed 2% of your adjusted gross income. Furthermore, it is not permitted to deduct losses deriving from mining from the personal income tax declaration.

It is also important to note that if you perform the task as a hobby, you can request deductions only if you have not taken the standard deduction.

In the United States, the IRS allows a standard deduction of $ 6,350 per person or $ 12,700 for a family (as per the 2017 fiscal year). So, unless your data mining deductions are bigger than this, it makes no sense to claim them.

If this is your case and you would still like to claim them as a hobby, you can do so in the form of detailed Program deductions. You can find examples of this form on the IRS website.

On the other hand, if you've classified your data mining as a business, there's no limit to deductions. Business expenses can be calculated using C planning of IRS tax forms.

Important considerations

As with any new technology, the laws surrounding them are initially vague. The cryptocurrencies are not different and IRS has stated that it is advisable to get the help of a tax professional if you are not sure of them.

Regardless of how you classify your mining house, you are obligated to pay taxes on it if the value of the coins you generate is more than $ 400 a year. If you're not sure how much cryptocurrency tax you may be responsible for, you can always use bitcoin tax calculators online.

It is also necessary to consider fully when it is planned to sell the cryptocurrency for Fiat. If you sell it in less than a year, you can be subject to short-term capital gains. If, however, the sale is made in more than a year, long-term gains will be considered and a different rate will apply.

You must also think carefully about how you would classify the operation. Even if labeling it as a "business" will allow you more deductions, you will have to pay the full 15% tax on self-employment. Furthermore, it may be necessary to prepare quarterly tax reports for IRS that could increase costs.

Conclusion

Cryptocurrencies at home are undoubtedly a great way to make extra money. It is also one of the most effective ways to get your hands on the newly minted coins to be placed in your cold room.

However, Uncle Sam is undoubtedly aware of the fact that the extraction of cryptocurrencies is a new and profitable endeavor that people have gathered vigorously. If you earn revenue in your mining operation, Taxman will want his slice of the cake.

As long as you are aware of your tax obligations and have an understanding of how to report your income and what you can deduce, there is not much to worry about.

Keep doinghing!