How To Deduct Bitcoin Mining Costs
“Miners” of bitcoin and other cryptocurrencies incur expenses related to their mining activity, such as the cost of electricity and internet service. Are these expenses tax deductible?
The short answer is yes, bitcoin mining expenses are tax deductible. However, the amount of the deduction – and the manner of taking the deduction – depends on whether the mining activity qualifies as a “trade or business.” More on this below.
Types of Deductible Mining Expenses
The tax code allows you to deduct any “ordinary and necessary” expenses from your bitcoin mining activity. “Ordinary and necessary” expenses can be anything that is common, accepted, helpful, and appropriate for bitcoin mining. This is a very flexible standard, and would generally include expenses like:
- Mining hardware (GPUs, ASICs, and component parts)
- Internet service
- Newsletter/forum subscriptions
- Mining pool fees
- Tax preparation
- Coin storage (USB, hardware wallets, safe deposit boxes, etc.)
Some of the above expenses need to be allocated between personal use and mining use, such as internet service and electricity. For example, you cannot deduct 100% of your power bill if your mining activity is done at home because some portion of the power was used for non-business things like running the refrigerator. Also, in the case of equipment like mining hardware, the deduction has to be taken as “depreciation,” which is subject to some special rules and limitations.
Business vs. Hobby
As mentioned, the method of deducting the above listed expenses will depend on whether your mining activity is a “business” or a “hobby.” According to the IRS, a “business” is an activity done on a substantial and continuing basis for the purpose of generating a profit. It does not have to be a full-time activity, just one that is done regularly and with a profit motive. Read: Is My Mining Activity A Business?
Deducting Mining Expenses As A Hobby
Bitcoin mining tends to be done as a hobby, not a business. This is because most bitcoin miners pursue mining only casually and don’t meet the “substantial, regular, and continuous” test for qualifying as a business.
As a hobby, bitcoin mining expenses must be deducted on Schedule A as an “itemized deduction.” This is unfortunate, because itemized deductions are subject to a number of limitations that greatly limit their value. For example, the rules for itemized deductions don’t allow expenses for home office, education expenses (like attending conferences), or start-up costs. Also, you can only deduct the amount of expenses that exceed 2% of your adjusted gross income and cannot deduct an overall loss from your mining activity.
Finally, itemized deductions are only deductible if you do not take the “standard deduction,” which for 2017 is $6,350 for singles and $12,700 for married taxpayers. So, unless your expenses are greater than the standard deduction (or you have other itemized deductions like mortgage interest expense), you would probably be worse off using your itemized deductions instead of the standard deduction.
Unfortunately, these rules render the deduction for mining expenses almost worthless for most bitcoin miners.
Deducting Mining Expenses As A Business
If your bitcoin mining activity qualifies as a business, the rules are much more generous. Any “ordinary and necessary” expense, including home office, education, and start up expenses, are deductible as a business. None of the Schedule A limitations for deducting itemized deductions come into play. Thus, business miners get a much greater benefit from deducting their mining expenses than hobby miners.
However, this benefit is not without a cost. As a business, the net-profit from bitcoin mining is subject to “self-employment tax,” which is an additional 15% tax on top of the normal income tax (although you do get to deduct 1/2 of the self-employment tax).
So, don’t automatically assume that qualifying as a “business” is preferable. Depending on the numbers, it’s possible that the added expense of the 15% self-employment tax may wipe out the benefit of greater deductions.
The Bottom Line
Yes, bitcoin mining expenses are tax deductible. However, the value of the deduction will depend on whether your activity is a “Hobby” or a “Business.” As a hobby, your ability to deduct mining expenses is limited. As a business, you have more flexibility to deduct mining expenses, but the net-profit from your mining is subject to self-employment taxes. Making the determination of which approach is right for you, as well as identifying deductible expenses, can be difficult. We offer a consultation service to help bitcoin miners determine the correct taxable treatment for their mining activity.