Is mining cryptocurrency a taxable event?
How is mined cryptocurrency taxed?
Hobbyist Miner
Example – 0.2 bitcoin is mined on 1st June and 0.3 bitcoins on 8th June. the fair market value of bitcoin on 1st and 8th June are $40,000 and $42,000 respectively. Then the filing will have two entries as follows,
Record no. | Source of income | Date | Fair market value | Taxable income |
1 | Cryptocurrency mining | June 1st | $40,000 | (40,000*0.2) = $8,000 |
2 | Cryptocurrency mining | June 8th | $42,000 | (42,000*0.3) = $12,600 |
TOTAL | 20,600 |
What is Fair Market Value of Cryptocurrency?
Fair Market Value is the price at which the asset would sell in a open market. The prices fluctuate throughout the day, yet you can find fair market value of cryptocurrency using formulas.
Mining as Business
When Mining is taken up as a business it gets all the tax benefits and legal requirements as the legal structure chosen. The main advantage of mining as a business is that it gets the option to deducts expenses before taxation. The tax rates could vary depending on the type of business and the tax rates of your business legislation. If you choose to mine in tax-free zones like Dubai, you’ll not be taxed,
Example – The taxes calculation on crypto mining works the same way as individuals except for the deduction. Consider the same scenario as above with equipment costing $3000 and electricity expenses accounting to $1000.
Record no. | Source of income | Date | Fair market value | Revenue | Deductions | Taxable Income |
1 | Cryptocurrency mining | June 1st | $40,000 | (40,000*0.2) = $8,000 | ||
2 | Cryptocurrency mining | June 8th | $42,000 | (42,000*0.3) = $12,600 | ||
3 | Business expenses | June 2021 | $3000 | $3000 | ||
TOTAL | 20,600 | $3,000 | (20,600-3,000)= 17,600 |
DEDUCTIONS ALLOWED ON MINED CRYPTOCURRENCY
Equipment: The PC hardware is the most major single investment you would do to start mining crypto. That can be written off as an expense.
Electricity Bill: Electricity on the other hand is the highest ongoing cost for a mining business. A survey showed 60% of the earned crypto value had to paid back as electricity bill in most countries. Good news, you can offset it as expense if you choose to create a business for mining.
Rent of place: Rent of operation of mining can be deducted.
Repair: repair of any kind on business equipment and place can be deducted.
Do I have to pay taxes on selling/buying products using mined cryptocurrency?
Capital gains tax on crypto = Base price – selling price
Example – Consider the same example (as above, from hobbyist mining). You are using the 0.5 Bitcoin at $50,000 fair market value. Then the capital gains sheet would look like this,
Record no. | Source of income | Date | Fair market value during acquisition | Taxable income | Fair market value during sale | Sale outcome | Taxable capital gains |
1 | Cryptocurrency mining | June 1st | $40,000 | (40,000*0.2) = $8,000 | $50,000 | (50,000*0.2) = $10,000 | (10,000 – 8,000) = $2,000 |
2 | Cryptocurrency mining | June 8th | $42,000 | (42,000*0.3) = $12,600 | $50,000 | (50,000*0.3) = $15,000 | (15,000 – 12,600) = $2,400 |
TOTAL | 20,600 | $25,000 | $4,400 |