Crypto Mining and Taxes: The Complete Business Guide

Understand your tax implications, calculations and reporting as a crypto mining operation to ensure compliance in our comprehensive guide.

Gui Laliberté


Elliott Watts · CFO at r3gen finance, ACA

Updated on

May 2, 2023

Crypto mining is a long-standing way to generate revenue in the cryptocurrency industry, with an estimated market size of $2.17 billion. 

In fact, Bitcoin's anonymous creator, Satoshi Nakamoto, mined an estimated 1.1 million BTC after launching the coin in January 2009.

However, like NFT taxation, the revenue earned through crypto mining is subject to taxes under most jurisdictions. This results in two taxable events that must be reported and included in the annual tax return.

This article explores crypto mining and taxes, touching on:

  • Crypto mining and its tax implications

  • Key differences between crypto mining as a hobby versus a business

  • Calculating and reporting crypto mining taxes

  • Tax compliance in crypto mining

What is Crypto Mining and How is it Taxed?

Crypto mining involves validators, also known as miners, operating physical equipment through computing power and electricity to secure blockchain networks. 

Miners continuously run rigs and compete with each other to solve complex mathematical puzzles. This is necessary to verify transactions and add new blocks to the associated chain.

In exchange for maintaining the ecosystem, miners earn a combination of block rewards and transaction fees. The more computing power (hashrate) a validator contributes to the network, the better their chances are to mine the next block.

It's important to note that crypto mining is only possible on blockchains that utilize the Proof-of-Work (PoW) consensus mechanism. Examples of such include Bitcoin (BTC), Dogecoin (DOGE), and Ethereum Classic (ETC).

On the other hand, no mining activity is present in Proof-of-Stake (PoS) networks, like Ethereum (ETH). This means that PoS validators (stakers) don’t operate physical equipment. Instead, they lock their coins (stake) for a specific period to validate blocks and earn rewards.

Despite these key differences, crypto mining and staking have one important similarity: they are both subject to taxation.

Crypto mining organizations are required to report and pay taxes on profits generated from mining. There are two notable income events:

  1. Mining income: realizing profits associated with receiving Bitcoin or other cryptocurrencies as mining rewards

  2. Price appreciation: realizing gains as the mined assets appreciate in value.

Besides the ones listed above, US-based mining farms could soon become subject to a new tax type.

Last month, President Joe Biden revealed the government's budget proposal for fiscal year 2024. As part of the planned changes, the US Treasury Department proposed a 30% excise tax on the cost of powering domestic mining facilities.

If passed, the new rules would require all companies using computing resources to mine digital assets to pay excise taxes based on the electricity type and amount used.

The proposed crypto mining excise tax is expected to be phased in over the next three years with a 10% increase each year until reaching its 30% target.

Crypto Mining Taxes 101: Hobby vs. Business Activities

Before calculating taxes, we should review the differences between mining crypto as a hobby and a business. It's an important aspect as tax authorities treat the two differently.

Hobby Mining (and its Deductions)

Hobby mining refers to a small-scale operation generally conducted through a single mining equipment or personal computer. The income generated from these activities is subject to ordinary income tax based on your personal marginal tax rate in most jurisdictions.

You can report hobby crypto mining income on Form 1040 Schedule 1 as "other income" in the US, while in the UK, you can report it as "miscellaneous income" through the HS325 Self Assessment helpsheet.

In addition to income tax, you are also subject to capital gains tax when disposing of the coins you mined and realizing a profit.

Becoming a hobbyist may seem like a simple solution, however, it has a significant downside: you can't deduct most expenses related to your mining activities. While it might be possible to make deductions in the UK, the U.S. considers this income directly taxable.

Business Mining (and its Deductions)

The costs of electricity and mining equipment are directly related to your profitability, so it may be a better option to mine crypto as a business.

As a business, you are still subject to both income and capital gains taxes on crypto mining. However you can deduct most expenses related to your operations assuming you fulfill certain eligibility requirements.

For example, in the US, you can deduct these cryptocurrency mining-related expenses under the following conditions:

  • Electricity costs: The IRS allows crypto mining organizations to deduct power utilized exclusively to mine digital assets as an expense. So, suppose you are running your operations from a property that utilizes electricity for other purposes as well. In that case, only the part of your bill directly related to mining will become deductible.

  • Equipment: If aggregate costs don't exceed $1 million, the purchase price of mining equipment is a deductible expense in the year of acquisition via a Section 179 depreciation deduction. Otherwise, you can utilize the modified accelerated cost recovery system (MACRS) to deduct equipment-related expenses over the next few years. Besides the purchase price, mining rig repairs are also deductible expenses in most cases.

  • Office space: Office space is also a deductible business expense for enterprise miners. However, similar to electricity costs, you can only deduct the expenses where you hold and operate mining equipment. 

  • Losses: You may offset other income with crypto mining losses, just like with other taxable business activities.

We always recommend consulting a Web3 accounting expert to get a clear picture of the mining-related expenses your organization can deduct.

Calculating Crypto Mining Taxes as a Business

Suppose your organization has set up its mining operations in 2022. You purchased 20 mining rigs for $2,000 each in January, which you utilized exclusively to mine BTC. By the end of the year, you mined 10 BTC at the average fair market value of $20,000 per coin via a US-based mining farm in Wyoming.

On December 31, you sold all your mined Bitcoin at a price of $30,000 each via an exchange platform. By the end of the year, you used 1,000,000 kW of electricity at an average cost of $0.10/kWh. Your organization also rented office space for $1,000/month and paid a contractor $1,000 to repair mining equipment.

Corporation Tax

Based on the above information, your crypto mining revenue, deductible expenses, and net income may look like the following (without capital gains/losses):

Your organization now has all the data ready for processing. To calculate your business' income tax for crypto mining, multiply the net income ($47,000) with the federal CIT rate of 21%, equaling $9,870. You don’t have to take state corporate income tax into account, as Wyoming has none.

If your mining operations had been in the UK, your organization's mining income would have been taxed at 19%, equaling £7,213 (~$8,930). Because this revenue is under £50,000 GBP, your business would qualify for the small profits rate as of April 1st.

Asset Appreciation Considerations

Besides your organization's income, asset appreciation should be considered after selling mined BTC.

To make the process straightforward, let's use the average fair market price of $20,000 for each BTC. With a 0.1% trading fee charged by the exchange executing the trade, you spent a total of $300 to sell all the Bitcoin you mined throughout the year.

As you sold all 10 BTC you mined at once on December 31, you have to calculate capital gains/losses based on the selling price ($30,000 per coin). No matter which method you choose for the calculation, the cost basis of each BTC becomes $20,030 ($20,000 + $30).

Consequently, you realized a $9,970 ($30,000 - $20,030) capital gain after each sold Bitcoin. That’s $99,700 in total for 10 BTC.

Your business is subject to the short-term tax rate of 24% (bracket between $95,375 to $182,100) in the US. This is because you sold your crypto mining rewards in less than a year after acquiring the assets. After calculation, your capital gains become $23,928.

As a limited company in the United Kingdom, you would pay corporation tax after your organization's capital gains at 25%, equaling £20,130 ($24,925). Notice that this rate is higher than for UK income tax. This is due to your profits exceeding £50,000. 

Reporting Crypto Mining Taxes as a Business

You can report your Bitcoin mining taxes in the US by following the below steps:

  1. Report mining income to the IRS as part of your organization's annual tax return (Form 1120, Form 1120-S, or Form 1065, based on the nature of the business entity)

  2. Report capital gains/losses to the IRS via Form 8949 and Form 1040 Schedule D

In the UK, the process is a bit easier, as you can report both your mining income and capital gains/losses as corporation tax. To do that, you have to file the corporate tax return of your business online or via the CT600 form.

But what happens if you don't report your cryptocurrency mining taxes?

No matter the jurisdiction, failing to report your mining taxes in your annual tax returns will likely lead to a government audit of your business. Based on the crypto audit findings, you may face interest payments, fines, and even criminal charges.

You’re able to submit an amended tax return (Form 1120-X in the US) to add all missing items related to your crypto mining business to avoid any penalties.

Tax Compliance in Crypto Mining

To demonstrate compliance, it is crucial that mining organizations ensure their tax calculations are accurate when submitted. As mining operations often produce thousands of transactions every month, it can be strenuous for financial teams to manage this process manually.

With Integral’s intuitive rule creation, financial operators can automatically categorize their mining revenues, allowing them to maintain operations with confidence. They can then review their capital gains or losses and synchronize those transactions with their ERP of choice. Additionally, when needed, Integral can generate compliant and detailed reports for any purpose, such as closing positions, cost basis, and crypto profit & loss.

Additionally, CFOs can see a real-time, complete picture of their Web3 treasury across multiple wallets to track their asset exposure.

Take charge of your digital assets with Integral — Enterprise-grade accounting that puts you in control.

Book a demo with our team and we’ll show you how quickly it can be done.