The passive activity trap.
You claimed depreciation on mining hardware in year one and produced a loss on paper. Whether that loss reduces anything else you pay tax on is a separate question, and it is not the one most people think they are asking.
5 min readTwo questions, not one.
ASIC miners are tangible personal property with a five year recovery period. When your business buys them and places them in service, the depreciation is real. Section 179 and bonus depreciation both apply to equipment of this kind. Nothing on this page disputes that.
The second question is where the resulting loss is allowed to go. That is governed by section 469 of the code, and it turns on facts about you rather than facts about the hardware. Most of the confusion here comes from treating these as a single question. They are not, and they can produce opposite answers for two owners who bought identical machines on the same day.
I am not going to tell you which answer applies to you. I do not know your other income, your entity, or how you intend to spend your time, and a website that claims to know those things is selling you something. What follows is the shape of the rule so you can put a sharper question to your accountant.
Active and passive are statutory categories.
Section 469 sorts each of your activities into one of two boxes. If an activity is passive to you, losses it throws off can generally be applied only against income from other passive activities. They do not reduce a salary, and they do not reduce income from a business you are genuinely involved in.
What cannot be used in the current year is not deleted. It is suspended and carried forward. That distinction matters more than it sounds, and I come back to it below.
The word passive here is a term of art in the tax code. It is not a description of how much attention the thing needs, and it is not a description of the arrangement I offer. I mention that because the two meanings get mixed up constantly, usually by people with a reason to mix them up.
Material participation has seven doors.
An activity is not passive to you if you materially participate in it. The regulations give seven tests and meeting any one of them is enough. Three of them account for most real cases.
The 500 hour test
You participate in the activity for more than 500 hours during the tax year. Across a full year that is roughly ten hours a week, every week.
Substantially all
Your participation is substantially all of the participation by every individual in the activity that year, including people who are not owners.
100 hours and no one more
You participate for more than 100 hours and no other individual participates more than you do.
Hours have to be spent on the activity itself and recorded as you go. Reconstructing a plausible log after an examination has started is a well travelled road to losing. There is also a specific exclusion for investor type work: reviewing reports and monitoring finances in a non managerial capacity does not count toward your hours unless you are involved in the day to day management of the activity.
My involvement counts against you on two of those tests.
This is the part that tends to be left off other operators’ sites, so here it is plainly.
If I source your hardware, monitor it and coordinate with the facility, those are my hours and not yours. The substantially all test gets harder, because a meaningful share of the participation in the activity is now someone else’s. The 100 hour test gets harder for the same reason, because I am the other individual it asks you to compare yourself against.
The 500 hour test does not care what I do. It only asks about you. But 500 hours is a real commitment, and if you are looking at outside support in the first place, ten hours a week is probably not what you had in mind.
So if the reason you are considering this is that you expect the year one loss to reduce tax on income from something else, get that answer from your accountant before you buy hardware rather than after. If the answer is no, that is worth finding out while the money is still in your account. I would rather lose the engagement there than have you discover it in April. More of this kind of thing is set out on what can go wrong.
A suspended loss is deferred, not destroyed.
Suspended passive losses carry forward without expiry. They become usable against passive income from this activity or another one in a later year. When you dispose of your entire interest in the activity in a fully taxable transaction to an unrelated party, the suspended losses attached to it are generally freed in full at that point.
The practical effect is usually about timing and character rather than a deduction that vanishes. That is a materially different outcome from the one people imagine when they hear the word disallowed, and it is worth understanding properly before it changes anyone’s decision.
Three more limits sit behind that one.
Section 469 is not the only gate, and it is not even the first one. A loss has to survive several tests in sequence before it reduces anything.
Basis
You cannot deduct a loss larger than your adjusted basis in the entity. Excess is carried forward until basis is restored.
At risk
Section 465 limits the deduction to amounts you genuinely have at risk. This is where certain non recourse financing arrangements get caught, and it is why how a purchase is funded can change the answer.
Excess business loss
Section 461(l) caps the aggregate net business loss a non corporate taxpayer can use against non business income in a year. The threshold is indexed annually, so ask your accountant for the figure that applies to the year you are actually in. Amounts above it convert to a net operating loss carryforward.
They apply in that order, basis then at risk then passive then excess business loss, and each keeps its own carryforward. A loss can clear the first three and still be limited by the fourth.
What none of this changes.
Take section 469 out of the picture entirely and something is still true. You own equipment. It is depreciable property on your books, it has a resale value, and it produces Bitcoin that arrives as business revenue with a cost basis established on receipt. That is a different mechanism from buying coin on an exchange with money that has already been taxed.
What the passive activity rules change is when the deduction can be used and against what. They do not change that you own the hardware, and they do not change that you own what it produces. Whether the difference between those two routes is worth anything in your specific position is a question with a number attached, and that number belongs to your accountant rather than to me.
Ask the question before you buy.
Thirty minutes on your capital, your timeline, your entity and how you expect to spend your time. If the deduction is the whole reason you are here and it looks like it will be suspended, I will say so on the call. You can also read how it works and what it costs first.
Book a discovery call No cost. No obligation. No follow-up sequence.