Cryptocurrency is an emerging technology that an increasing number of taxpayers are looking into. While you probably don’t have a lot of clients who use cryptocurrency, it’s important to stay on top of emerging trends. We’ve written before about cryptocurrency and how the IRS views it. Here’s an article by Coincentral.com that take a deeper dive into the legislation surrounding cryptocurrency mining.
This article was originally posted at Coincentral.com and has been reposted with their permission.
Written by Delton Rhodes
Prior to late 2017, very few concrete cryptocurrency mining taxes existed in the United States or the rest of the world. As the values of top cryptos like BTC, ETH, and several others began to rise in late 2017, more cryptocurrency miners became more concerned with the possibility of taxation on crypto assets and for good reason. Government agencies around the world are starting to place more taxes on cryptocurrency mining. If you mine cryptocurrency, here’s what you should know about recent tax regulations. First, we’ll look at the newly-introduced US laws. Then, we’ll look at some cryptocurrency mining taxes from throughout the rest of the world.
US Mining Tax Laws
Even though it might have been possible to legally not pay taxes on crypto mining in the past, anyone making profits off of cryptocurrency mining in 2018 (Tax Year 2019) and beyond will now be subject to taxation. Regardless if you are mining as a small side-hustle/hobby or a full-time business, there are new rules which the US Congress passed in December 2017 that change the way the IRS treats cryptocurrency.
Like-Kind Rule Era Is Over
Before the US Congress put forth a clearer ruling in 2017, the classification category of cryptocurrency assets was up for interpretation according to many tax experts. That’s because many cryptocurrency miners and traders treated cryptocurrency similar to real-estate for tax purposes by citing IRC Section 1031 (a.k.a. the like-kind rule).
Essentially, this ruling meaning that a miner could theoretically trade a mined cryptocurrency for another cryptocurrency without having to pay taxes. Now, however, there are no more tax exemptions. US citizens and anyone with bitcoin mining operations in 2018 will have to pay taxes beginning in 2019.
2 Main Tax Categories
Another important aspect to consider is how you report cryptocurrency mining gains as a source of income. There are currently two options in the US.
- The first option is to report earnings from mining as self-employment income and income tax. With this choice, you are able to deduct expenses like mining equipment, electricity bills, and other related expenses. The tricky aspect about this is that if you mine at home, for example, you would need to have a separate electric meter to measure the energy consumed specifically for mining purposes. If you use the same electric meter for other purposes (i.e. heating and cooling), it’s much harder to get IRS approval on a provable business deduction when expenses for work and home are listed on the same bill. The main disadvantage to this option is that, unless you consume a significant amount of electricity, taxes will likely be much higher than the second option.
- The second option is to report earnings from mining as “other income”. On the surface, this doesn’t seem like a good option since you won’t be able to deduct taxes on expenses as you can with the first option. However, overall taxes should actually be lower with the second option because you would essentially be listing all earnings under the hobby/secondary income stream category, which has a much lower tax percentage than the first option.
There are a couple of things to consider when paying taxes for mining profits as a secondary income stream. According to TurboTax, the first taxable event occurs whenever a miner mines a new coin. The IRS considers this to be “income” even if the miner decides to only HODL. From a miner’s perspective, it might be difficult to put a dollar figure equivalent to a mined coin due to the constant price fluctuations of cryptocurrencies. The best way to keep track of value is to write down prices at the time you mined a given coin. However, it’s important to do this in order to be as compliant with tax laws as possible. For miners who HODL mined crypto and don’t cash in for dollars directly away after mining, this brings some uncertainty. What could have been a net profit gain today could very well become a net loss tomorrow.
In addition, whenever you profit off of a trade of any given mined coin, you have to pay a second, separate capital gains tax. It’s important to note that if you mine a given cryptocurrency and immediately convert to US Dollars, it’s not necessary to pay capital gains taxes.
What About Countries Besides the US?
Similar to the US, a lot of other countries have quickly changed their positions towards crypto taxation in wake of cryptocurrency value increases in December 2017/January 2018. Even as prices have gone down, governments appear to be more polarizing than ever before on this issue. Some nations are placing taxes on both traders and miners. Other nations are creating cryptocurrency tax havens. This doesn’t serve as a comprehensive list, but here are a few examples to consider.
***Tax regulations as of April 27, 2018 (Regulations can change quickly, so be sure to conduct your own research.)
- Australia- Mining is treated like stock trading; therefore, it is taxed.
- Belarus- Crypto tax breaks will officially last until at least 2023.
- Denmark- In the future, cryptocurrency companies will be taxed. Private individuals won’t be taxed.
- Germany- There are no taxes if crypto is held as an asset for greater than one year. After that time, it is possible to convert crypto to Euros or other currency without having to pay capital gains taxes.
- Japan- Similar to the US, crypto is possibly subject to income taxes and capital gains taxes.
- Singapore- Cryptocurrency isn’t treated as capital gains; however, there is a ‘Goods and Services Tax (GST)’ at around 7%.
- Slovenia- Currently no taxes on crypto.
- United Kingdom- Here’s a detailed guide.