When you mine cryptocurrency, the IRS treats the fair market value of each coin or token at the time you receive it as ordinary income. If you mine as an individual, it is also subject to self-employment tax at 15.3%. This creates a tax liability on receipt — before you sell anything.

Income Recognition

Revenue Ruling 2014-21 and IRS Notice 2014-21 establish that mined cryptocurrency is gross income under §61. The amount of income equals the fair market value of the mined crypto on the date it is received — meaning the date the block reward or mining pool payout hits your wallet. For a miner receiving daily payouts, each payout is a separate income event requiring separate valuation.

Self-Employment Tax

If you mine as a sole proprietor or independent contractor, mining income is subject to self-employment tax (Social Security and Medicare) at 15.3% on the first $168,600 (2024 threshold) and 2.9% above that. This is in addition to income tax. A miner generating $100,000 in mining income could owe over $15,000 in self-employment tax alone, before income tax.

Business Deductions

Mining expenses are deductible against mining income if you operate as a business rather than a hobby. Deductible expenses include: mining hardware (depreciated under §179 or MACRS), electricity costs, internet service, cooling systems, facility rental, maintenance, and software subscriptions. Proper documentation of expenses is essential — keep receipts, utility bills, and equipment purchase records.

Business Structure

Operating as an S-Corp can reduce self-employment tax by splitting mining income between salary (subject to FICA) and distributions (not subject to FICA). The salary must be reasonable for the work performed. This structure requires additional administrative cost but can produce significant tax savings for profitable mining operations.

When Miners Need Help

Mining operations that failed to report income, deduct expenses, or file returns face compounding penalties and interest. Attorney Darrin T. Mish resolves mining tax problems from unfiled returns through OIC settlements. Free consultation to evaluate your situation.