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At BitCap, we want to ensure that our clients are aware of how to navigate the tax code as it relates to mining. If you are a U.S. citizen, here are a few things to think about before the year has concluded.
Your mining pool may send you a tax form reporting this income to you*. The mining income goes on From Schedule 1 (no expenses taken) or Schedule C (reduce mining income with related expenses). The first piece of advice is put your mining income on Schedule C. While you have to pay self employment tax on that income, there are some expenses that you can take to reduce that amount.
Most people are on the cash basis of accounting, which means if you pay for the service you can deduct it on the current year’s taxes. Think about prepaying some of your monthly hosting to increase that expense. But keep in mind, next year will have less hosting expenses unless you keep prepaying at the end of the year.
Put some of the profit back into more cryptocurrency machines. The main thing about buying more equipment is the cost can not be deducted until the equipment is put into service. You will need to report the purchase of the machines on the depreciation forms, as the IRS doesn’t allow for straight expenses for these purchases. That means these machines will need to be capitalized depreciated over the next 5 years. However, there are some rules that will speed that depreciation up. For 2023, 80% of the price can be taken as Bonus depreciation with 20% to be taken over the 5 years. In 2024, this changes to 60% bonus/ 40% regular.
To get our recommendations and help in sourcing some new machines click below.
Fund it with your mining income. This is a good way to hold the crypto for a long time and prepare for your future. There are many options to choose from, each with their own benefits. Please reach out to your trusted financial advisor.
Leverage your crypto
Borrow against your crypto assets. Tools like Aave, Compound, or companies are SALT are available to pull the purchasing power from your crypto without losing your exposure to it.
Hold your crypto for more than a year. Finally, keep in mind there are taxes on the disposal of cryptocurrencies as well. Any time you get rid of crypto, there is a gain or loss determined by the change in price between mining the coin and disposing of it. How it is treated by the IRS is determined by how long you hold it. Holding your mining income for more than a year, triggers a more favorable tax treatment of that gain or loss.
Donated cryptocurrency is not subject to capital gains tax and you can claim a tax deduction based on the value of the donation. However, an appraisal is needed for any donations over $5,000.
If you want to help your personal family, consider giving them some crypto. The annual gift exclusion is $17,000 per person for 2023. A gift of $17,000 to your daughter and $17,000 to your son is allowed, but will trigger the filing of a gift tax return. (By the way, in-laws are allowed as well.)
We are not in the business of providing tax advice or services. These recommendations are general in nature. All tax situations are individual in nature and what works for one person may not work for another. Please let us know if there are things you would like additional information about, but please consult your personal financial advisor or tax preparer before you make any decisions about your individual tax circumstances.
* Most crypto exchanges are going to send a 1099-Misc form to you and the IRS reporting the Crypto income. This rule is new this year, but is expected to continue.
Starting in 2025 a new 1099-DA form will report the information. Please note BitCap is not a crypto exchange and will not be providing any list of mining payouts or 1099’s. If any such document exists, it would be generated by your mining pool who is actually handling your payouts.
