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Cryptocurrency Mining & Taxes

August 26, 2019

The IRS has ramped up its tax collection efforts regarding cryptocurrency gains in recent months. The IRS makes this fact very clear in public statement IR-2019-132. Those suspected on having profited from cryptocurrency will receive a letter notifying them about tax debt compliance. Depending on the situation of a given recipient, amended or delinquent returns may be necessary. Cryptocurrency holders also may need to obtain assistance from a qualified tax attorney. The recent tax enforcement by the IRS regarding cryptocurrency should also spur better tax planning. If you don’t have cryptocurrency tax debt now, but plan to acquire future cryptocurrency, plan now for future tax liabilities.  

In this post, we will discuss tax advice for those who plan to “mine” for cryptocurrency. First, we will go over the basics of cryptocurrency mining for those who aren’t familiar with this concept. Then, we will explore how miners can best plan ahead for the tax liabilities incurred in their trade.  

Basics of Cryptocurrency Mining Tax

The term “mining” was first introduced when bitcoin was first launched back in 2009. Mining refers to the use of computers to verify pending cryptocurrency transactions. After a pending transaction is verified through puzzle-solving, those transactions are logged on the public transaction ledger. This process of mining is the means by which more bitcoin is created. When a miner successfully verifies a pending transaction, the miner receives new bitcoins. Now, mining for bitcoin has become extraordinarily difficult because the computer power required for cryptographic verification has become so enormous. But, back when bitcoin was getting underway, it was very possible for a lone miner to obtain a substantial amount of bitcoin on his or her own. Today, a lone miner could still acquire bitcoin through mining, but that miner would need to have a huge amount of computer power at his or her disposal. 

Whether you’ve mined for bitcoin (or other cryptocurrency) in the past or plan to do so in the future, you need to plan for the upcoming taxation.  

Basic Guidance in Notice 2014-21 

The main source you should consult is IRS Notice 2014-21. This document will assist you in tracking down the other materials you need to prepare for your tax bill. According to Notice 2014-21, bitcoin and other cryptocurrencies are “property” for tax purposes. This means that the same tax principles which apply to other, similar forms of intangible personal property (i.e. stocks, bonds, etc.) also apply to cryptocurrency. This makes preparing for taxes fairly straightforward for most tax liabilities involving cryptocurrency.  

Prepare for Self-Employment Taxation 

If you mine bitcoin or other cryptocurrency, you need to pay self-employment taxes. That is, unless you mine for a company as an employee. The self-employment tax will be placed on top of your federal income tax rate. Currently, the self-employment tax consists of 12.4% for Social Security and 2.9% for Medicare. Again, this is in addition to the federal income tax rate which applies to your level of income. This puts a miner in a rougher tax situation than someone who mines as an employee. If you mine as an employee, half the contribution will be paid by your employer. That lessens your financial obligation and puts more money in your pocket. But, if you do mine as a self-employed person, you need to take care of the tax by yourself. 

Prepare for Standard Tax Payments and Reporting Requirements 

If you’re a cryptocurrency miner, you also need to comply with standard tax payments and reporting requirements. It’s no different from requirements that apply to other self-employed individuals. This means that you’ll need to submit a standard tax return. That includes the income you’ve generated and a computation of your total tax liability. Along the way, you’ll need to submit estimated quarterly tax payments, which is standard for self-employed individuals. This means that you’ll need to send payments to the IRS on a regularly quarterly schedule. You can find the quarterly due dates by visiting the IRS website. Simply put, as a miner, you’ll be treated just like any other self-employed businessperson. Miners and cryptocurrency holders ofter prefer to think of themselves as “outside” the official system. Despite that self-perception, the IRS just doesn’t see things the same way. 

Contact MC&C for Further Information Today 

If you’re a cryptocurrency miner, or you’ve mined in the past, we recommend contacting a qualified tax attorney. Navigating through the complex rules which apply to cryptocurrency gains isn’t easy. At Mackay, Caswell & Callahan, P.C., we’re familiar with what’s been taking place in the virtual currency world and can help you sort out your situation. MC&C has kept up with the IRS’ attempts to bring order to the cryptocurrency world. We’ve written about the latest public statement (IR-2019-132) and Notice 2014-21 in the past. There’s no need to feel overwhelmed by all the activity going on with the IRS regarding bitcoin and other cryptocurrencies. Reach out to us today and we can give you the assistance you need. Contact one of our top New York City tax attorneys and we will respond immediately. 

Image credit: BTC Keychain 

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