Bitcoin Mining As A Business
According the IRS, a “business” is an activity in which you are engaged on a substantial and continuing basis for the purpose of generating a profit. This does not have to a full-time activity, just one that you regularly pursue with a profit motive. Thus, the determination of whether or not you are in the “business of bitcoin mining” will hinge on the size and scope of your mining activities. This is a highly fact specific inquiry, and would include questions like:
- Does the time and effort you put into mining indicate an intention to make a profit?
- Do you depend on income from mining?
- Do you monitor your mining and make changes to improve profitability?
- Do you have the technical knowledge needed to carry on bitcoin mining as a successful business?
- Have you made a profit from bitcoin mining in the past?
- Can you expect to make a profit in the future?
- Are future profits (or losses) due to circumstances beyond your control?
Reviewing these questions should give you a basic idea of whether or not you are engaged in the “business of bitcoin mining.” For example, a person who sets up an old laptop and leaves it hashing day and night in the closet is probably not engaged in the business of bitcoin mining. This is because he or she does not put much time/effort into the mining activity, does not depend on it to generate income, does not monitor or reconfigure the laptop to improve efficiency, does not exercise much technical knowledge, and is unlikely to become profitable unless bitcoins substantially appreciate in the future. These factors all indicate a casual activity that the miner hopes will generate some income, but which he does not actively pursue on a substantial or continuous basis.
On the other hand, compare a casual miner with a person who runs a dedicated and complex mining operation. This miner probably dedicates significant time and effort to the setting up and configuring mining rigs, consistently monitors them and makes changes when necessary to maximize hash rate, possesses and applies technical knowledge in order to make the mining activity profitable, generates significant income that helps to pay his or her living expenses, and expects to be profitable after recouping the initial investment. As such, it is very possible that this miner is engaged in the “business of bitcoin mining” due to the extensive nature of his activity.
Either way, there is no one-size-fits-all definition of a mining business. Whether or not your activity rises to the level of an actual business will depend on the specific facts of your case. Getting the determination wrong can have significant tax consequences, so you should consult with a bitcoin tax attorney to determine the proper classification of your mining activity.