This is considered ordinary income and is taxed at its marginal tax rate, which could range from 10 to 37%. Ordinary income tax rates range from 10% to 37%, depending on your tax bracket. Mined cryptocurrencies are taxed as income when earned and as capital gains when disposed of. The IRS classifies cryptocurrencies as a type of property, rather than a currency.
If you receive Bitcoin as payment, you must pay income taxes on its current value. If you sell a cryptocurrency for profit, you pay taxes on the difference between the purchase price and the product of the sale. If you're about to cash in on a large cryptocurrency investment, check the rest of your portfolio to see if there are other losing investments you can sell to offset your gains. The fair market value of the cryptocurrency will be added to your other taxable income received throughout the year.
For this reason, many choose to incorporate their cryptocurrency business as a transfer entity (a corporation, LLC or S Corp.) or a C corporation. If you can afford to have time on your side, you can always try to wait for a lower tax rate to arrive, says Jeff Hoopes, associate professor at the University of North Carolina and director of research at the UNC Tax Center. If you invest in cryptocurrency with a retirement plan, such as a traditional IRA or a Roth IRA, you can postpone or completely avoid investment gains, although it's not as easy as investing through a regular brokerage account. Dollars, which generally means converting the value of your cryptocurrency to dollars when you buy, sell, mine, earn or use it.
The hardware and electricity costs of a mining platform, combined with a volatile crypto market, mean that a mining company is likely to lose money over the course of a fiscal year. While your cryptocurrency exchange may provide a 1099-B stating your cryptocurrency transactions to both the IRS and you, it may not record the cost base or the original amount you paid for your cryptocurrencies if you transfer coins between inactive offline wallets and your account. And just like if you sell any other investment at a loss, if your investment in cryptocurrency has dropped in value when you sell it, you can claim a loss of capital, which you can use to offset other income taxes. Right now, if you want to open a cryptocurrency or Bitcoin IRA account, you'll need to open a specialized account called a self-directed IRA in boutique firms that offer cryptocurrency investments.
If you mine cryptocurrency as a trade or business, not as a hobby, you may be entitled to certain deductions for equipment, electricity, repairs and leased space to reduce your tax liability. Tools such as Koinly and Cointracker connect to cryptocurrency exchanges and wallets to track your cryptocurrency transactions and complete the forms you need to file your cryptocurrency taxes. If the value is lower, you will have a capital loss that you can use to offset your gains through a strategy known as tax loss collection. TaxBit specializes in identifying mining receipts and assigning them in accordance with IRS regulations.
Cryptocurrency mining can have multiple tax implications that must be stated on separate forms, and you'll need to distinguish whether you're mining as a hobby or as a business.