How is Cryptocurrency Taxed? Explained with Examples

Cryptocurrency is not the hot topic among boomers anymore. It’s more a mainstream investment class with varied methods of buying, selling and trading with it. Mining is one of the most popular methods to acquire cryptocurrency outside of buying in crypto exchange.
With increased popularity in crypto trading and practical use of cryptocurrency as debit cards and more, taxation is becoming more definite and difficult than ever. So, here we have tackled all the essentials of taxes related to mining cryptocurrency. 

Is mining cryptocurrency a taxable event?

Yes, mining cryptocurrency is a taxable event. It is considered the outcome of a work done and hence taxable as an income. Depending on the mining setup it occurs in either personal income or business income. 

How is mined cryptocurrency taxed?

Cryptocurrency mined is taxed based on the ‘fair market value’ of fiat currency of the taxpayer’s legislation, during the time of acquiring the cryptocurrency. This value needs to be recorded and filed accordingly. 

Hobbyist Miner 

Crypto mining activity which is carried out a hobby without proper company registration is to be accounted in the individuals tax payer. Hobby mining activity is not eligible for any deductions. The income tax rates can vary from 10% to 37% depending on the state and country tax policies you live in. 

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
When mining is done as a business, you are allowed to offset some of your ‘cost of running the business’ (mining) against the revenue generated. Thereby reducing the taxable value of cryptocurrency mining. 
Here is the list of permissible deductions for crypto mining, 

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?

Yes, selling, trading or paying using the mined crypto currency triggers a tax event. The cryptocurrency once mined is a capital asset to the tax payer. The acquiring value is taken for the income tax calculation and also considered the base price for capital gains tax calculation. 
If in the future you sell, exchange the mined crypto currency for another or use it to pay for service/product the transaction needs to be reported as a capital asset. If the selling price is lesser than the base price at which it is acquired then you are not liable to pay any taxes. You can offset other capital gain taxes with the loss. 
Capital gains tax on crypto = Base price – selling price
The capital gains tax rates vary depending on the period of holding (long-term capital gains/short-term capital gains) and the tax slab of your income. 

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
So, now you pay taxes at two levels – income tax on mined value and capital gains tax on appreciated value accounting as high as 50% 
The combination of right legal structuring, tax optimization and forming your company in a tax-free zone can minimize the taxes drastically. And that is what we do at GCG Structuring. We have crypto experts, financial leaders to get your mining company setup wherever to minimize taxes.