How mining income is taxed.
Every reward your hardware produces is income on the day it arrives, valued at what it was worth that day. That one fact drives most of what follows, including a second tax event that has not happened yet.
4 min readRewards are income on receipt.
The IRS treats digital assets as property rather than currency. A mining reward is ordinary income, measured at the fair market value of the coin at the point you gain dominion and control over it. That is the position set out in Notice 2014-21 and it has not softened since.
The timing catches people out because it is not intuitive. You are taxed when the coin arrives, not when you sell it, and not when you move it somewhere you prefer to keep it. A year in which you sold nothing at all can still produce a substantial income figure.
The date does double duty. The value on the day a reward lands is both the income you report for that year and your cost basis in that coin for whenever it eventually leaves. Get the first one wrong and you have also got the second one wrong, usually without noticing until years later.
Self-employment tax is the part that surprises people.
If the activity is a trade or business carried on by you individually, or through a single member LLC that is disregarded for tax purposes, the net earnings are subject to self-employment tax on top of income tax. This is separate from your bracket and it applies before you get to it.
Social Security portion
12.4% of net earnings, up to a wage base that is indexed annually. Ask your accountant for the figure that applies to the year you are in rather than working from a number you read somewhere.
Medicare portion
2.9% of net earnings with no ceiling. It applies to every dollar.
Additional Medicare
A further 0.9% above a threshold that depends on your filing status. It is not indexed.
The partial offset
Half of the self-employment tax is deductible in arriving at adjusted gross income. It softens the number without changing the rate.
Entity choice changes this analysis, which is why it comes up early in most conversations. An S-corp election in particular alters how much of the profit is exposed to these rates, and it brings its own obligations and costs with it. I have written that up separately in the S-corp question. It is not free money and it does not suit every owner.
The second event.
Selling mined coin is a disposal. So is spending it, and so is swapping it for another asset. The gain or loss is the proceeds less your basis, and your basis is the amount you already included in income when the reward arrived.
That is worth sitting with, because it means the coin has been taxed once already. The second event only reaches the movement in value between the day it arrived and the day it left. If it has not moved, there is very little left to tax.
The holding period starts the day after receipt and the twelve month line decides the rate. That is a large enough subject on its own that I have given it its own page.
Which makes this a record keeping problem.
Almost every difficulty I see in this area is a records problem wearing a tax problem’s clothes. The rules are not especially complicated. Reconstructing two years of per reward values after the fact is what is hard.
Per reward
Date, quantity and fair market value in dollars for every distribution, not a monthly total. The monthly total cannot be unpicked later.
Per disposal
Date, proceeds, and which specific lot left. Lots acquired at different times carry different bases and different holding periods.
Consistency
Whatever identification method you use, apply it the same way every time and be able to show that you did.
Source documents
Pool statements and wallet records kept in their original form. The spreadsheet you built from them is a derivative, and it is not the evidence.
Exchange reporting has tightened considerably, and disposals are increasingly filed on your behalf whether or not your own records agree. A gap between the two is now much easier to see from the outside than it used to be.
What I do here, and what I do not.
I am not your accountant and I do not prepare or file your return. Nothing on this page is advice about your situation, and I have deliberately not put a single figure from your circumstances on it.
What I produce is the underlying record: monthly production statements with per reward dates and values, purchase invoices and machine serial numbers, and hosting costs by site, in a form your accountant can file from. The entity questions, the elections and the timing are theirs to answer. That division is the honest one, and it is also the one that keeps your position defensible.
Ask the question before you buy.
Thirty minutes on your capital, your timeline and your entity. If the tax position is the reason you are looking at this, bring your accountant into it early and I will tell you what they will need from me. You can also read what is deductible and what can go wrong.
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