Crypto mining tax: A beginner’s guide

Cryptocurrencies may be digital, but that doesn't mean they're created out of thin air. Many early crypto projects, like Bitcoin (BTC), are secured and issued through a process known as mining.

At first, anyone with a computer – or even a smartphone – could contribute to Bitcoin's blockchain and mine BTC by validating transactions. But as BTC grew into a multi-trillion-dollar asset, mining evolved into a large-scale industry, with companies investing significant computing power to earn rewards.

Before you get started, it’s important to understand how crypto mining taxes work in the U.S. In this guide, we’ll tell you what you need to know.

What is cryptocurrency mining? 

Crypto mining is the oldest and most established method for verifying transaction data on peer-to-peer (P2P) blockchains. Introduced in Bitcoin’s 2008 white paper, the process involves solving complex mathematical puzzles that require significant computational power. Networked computers (miners) compete to find the correct solution, and the first to succeed adds a new block to the blockchain and receives cryptocurrency as a block reward. Because miners must "prove" their success through computational efforts, this system is known as proof-of-work (PoW).

While Bitcoin remains the largest and most competitive PoW blockchain, it’s not the only network that offers mining incentives. Others, including Dogecoin (DOGE), Bitcoin Cash (BCH), and Monero (XMR), also reward miners for securing the network and validating transactions. In each case, anyone with the right hardware and a stable internet connection can participate. However, mining comes with costs – electricity and maintenance expenses can add up quickly. Bitcoin mining, in particular, demands significant computational power, making it far more competitive than smaller PoW blockchains.

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How is crypto mining taxed in the United States?

Earning crypto through mining – often referred to as "block rewards" – is considered taxable income in the U.S. The IRS first addressed the tax treatment of mining in Notice 2014-21, stating that mined cryptocurrency must be included in gross income at its fair market value (FMV) on the date it is received (Q-8). 

The tax treatment of mining depends on whether the activity is classified as a hobby or a business. This classification affects how miners report their rewards, which expenses they can deduct, and their overall tax liability. While both are subject to income tax on mining rewards, business miners can generally claim additional deductions and tax benefits.

Mining as a hobby

According to IRS Notice 2014-21 and current tax law, miners must include the FMV of any mined cryptocurrency as gross income on the day they gain dominion and control over it, reporting it under “Other Income” (Schedule 1, line 8v: digital assets received as ordinary income). If they later sell those assets for more than their FMV at the time of mining, capital gains taxes apply.

Prior to the Tax Cuts and Jobs Act (TCJA), hobby miners could deduct expenses, up to the income from the activity, as miscellaneous itemized deductions on Schedule A. However, TCJA suspended these deductions through at least 2025. This means that hobby miners must report income from mining but cannot deduct any related expenses.

Mining as a business

Miners operating at a larger scale may qualify as a business, allowing them to deduct business expenses. To be recognized as a business by the IRS, miners must demonstrate continuity and regularity in their operations and a profit motive. If they meet these criteria, they can generally report mining income under one of the following tax forms (or schedules) depending on the entity’s structure:

• Schedule C (Sole Proprietorship)
• Form 1065 (Partnership)
• Form 1120-S (S Corporation)
• Form 1120 (C Corporation)

Business miners still report block rewards as gross income, but they can generally deduct all ordinary and necessary business expenses without limitations on taxable income, meaning net operating losses can be created and carried over as applicable. Eligible deductions may include:

• Depreciation on property and equipment, including mining equipment (e.g., ASIC rigs and GPUs), software, computers, furniture, machinery and leasehold improvements
• Electricity and internet costs
• Salaries and wages
• Payroll taxes
• Employee benefit programs
• Repairs and maintenance
• Rents 
• Home office expenses
• Interest
• Advertising
• Supplies and small equipment (e.g., cables, cooling fans, replacement parts)

Mining equipment is generally depreciated under the Modified Accelerated Cost Recovery System (MACRS). Business miners may claim bonus depreciation (currently 60% for qualified property placed in service in 2024 and 40% in 2025) or elect Section 179 expensing for eligible purchases. The depreciation method and election depend on factors such as business income, equipment cost, and tax planning strategy.

Additionally, business miners may qualify for the de minimis safe harbor election, which allows them to immediately expense certain purchases up to $2,500 per item or invoice ($5,000 for businesses with an applicable financial statement) instead of capitalizing and depreciating them. This can apply to smaller mining-related purchases, such as replacement components, power supplies, and certain peripherals, reducing the need for long-term depreciation.

Business miners, other than C corporations, may be eligible for the Qualified Business Income (QBI) deduction under IRC §199A (set to expire after 2025 unless extended). This provision allows eligible taxpayers to deduct up to 20% of their QBI, potentially reducing taxable income. Eligibility and the deduction amount depend on factors such as taxable income, the nature of the mining activity, W-2 wages paid, and the unadjusted basis of qualified property. The application of Section 199A to cryptocurrency mining is complex, and miners should consult with a tax professional to assess eligibility and ensure compliance with current IRS guidelines.

Crypto mining taxes for disposals

Some miners may worry that selling cryptocurrency they’ve mined results in double taxation, but this is a misunderstanding. While mined cryptocurrency is taxed when it is received and also triggers a separate taxable event when it is later sold or exchanged, the original value becomes your tax basis for the disposition event.

When a miner receives cryptocurrency as a block reward, the FMV of the crypto on that date must be reported as income. If the miner later sells, trades, or otherwise disposes of the cryptocurrency at a different value, the difference between the original FMV and the amount realized at disposal must also be reported.

For example, James mines 1 Bitcoin when its market value is $40,000. He reports this amount as income in the year it is mined. A few months later, he sells the Bitcoin for $45,000. He must report the $5,000 difference between the value when mined and the selling price as a taxable capital gain.

Tax planning for miners

Mining income is received without any tax withholding, meaning miners are responsible for making quarterly estimated tax payments to avoid penalties. If you expect to owe $1,000 or more ($500 or more for corporations) when you file your return, you generally have to make estimated payments.

Crypto price volatility can also create unexpected tax challenges. If you mine cryptocurrency when prices are high but don’t sell immediately, you could owe taxes on the initial FMV even if prices drop by tax time. On the flip side, if prices rise after mining, selling to cover your tax bill could create additional taxable gains.

To avoid these issues, miners often convert a portion of their mining income into fiat throughout the year to ensure they have enough funds to cover tax liabilities.

To simplify tax tracking, CoinTracker allows you to mark received coins as "Mined" in the Transactions page, making it easy to see mining income separately from capital gains.

What is the 30% mining tax?

The Digital Asset Mining Energy (DAME) tax was a proposed 30% excise tax on cryptocurrency miners' electricity costs, introduced as part of President Biden’s 2024 budget. The administration positioned it as a measure to address environmental concerns related to crypto mining's energy consumption.

However, the tax faced strong opposition – it was ultimately removed during negotiations and never became law. With shifting policy views on digital assets, it remains unclear whether similar measures will be introduced in the future.

Is it possible to avoid taxes on crypto mining?

Whether you're mining as a hobby or running a business, all mining rewards are subject to tax when received. While you can’t avoid paying taxes on mined crypto, there are ways to reduce your overall tax burden:

• Hold mined coins for at least a year: The simplest way to lower tax liability on mined crypto is to hold it for at least one year before selling. Afterward, it qualifies for long-term capital gains tax rates, which are typically lower than short-term rates.
• Use tax-loss harvesting: Tax-loss harvesting allows miners to reduce taxable income by selling assets at a loss to offset gains. However, this strategy can only offset capital gains and does not reduce the tax owed on mining income. Individuals may deduct up to $3,000 of net capital losses against ordinary income per year, while corporations can only use losses to offset capital gains.
• Reinvest in equipment: Mining businesses that reinvest in hardware, software, or electricity costs may qualify for accelerated tax deductions. Depreciation expenses and business-related upgrades can help offset taxable income while improving mining efficiency.
• Consult a crypto CPA: A tax professional with cryptocurrency expertise can help you determine whether your mining activity qualifies as a business, properly plan for tax obligations, and, when it comes time to file, ensure you maximize deductions.

Mined crypto taxes made easy with CoinTracker

Managing taxes on mining rewards can be complicated, especially with changing IRS regulations. Keeping accurate records is key to staying compliant and minimizing your annual tax burden.

CoinTracker’s Portfolio Tracker simplifies the process by automatically detecting mining income, organizing it into tax-ready forms, and logging all your crypto trades, staking rewards, and liquidity pools for a complete view of your web3 activity.

Join millions of crypto investors who trust CoinTracker by getting started with a free account today.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.