Clients who mine cryptocurrencies often ask me what they are able to write off. The short answer is it depends if their activity is classified as a hobby or a business. Either way you can write off expenses, but as noted below, the amount you can write off varies depending on how the IRS classifies your activity.
Cryptocurrency Mining as a Hobby
If you are simply mining a few coins here and there on the background of your personal laptop, chances are your activity is considered a hobby. You may still have expenses you can write off, but these are limited to the amount of income you incur from mining. In this case you would write off your expenses on Schedule A, and would only benefit if your expenses included with other expenses you itemize are greater than the standard deduction. This upcoming tax season the standard deduction is $6,500 for singles and $13,000 for married couples.
Cryptocurrency Mining as a Business
If on the other hand you invest in bitcoin mining rigs such as ASIC bitcoin mining hardware, install fans or A/C units, configure mining rigs to maximize the hash rate, or perform other related activities in a “businesslike manner,” chances are your activity can be considered a business. In this case, the expenses you deduct do not have to be itemized, and your expenses can potentially be greater than your income from mining. You would want to deduct your expenses on Schedule C instead of Schedule A, and the total difference between income and expenses would appear on line 12 of your 1040. Keep in mind that income from cryptocurrency mining as a business is subject to self employment tax.
Once the determination on how to classify your activity is made, the next step is to look at what deductions can be taken. One of these deductions could potentially be a percentage of your living quarters if you qualify for the home office deduction. To qualify as a home office, the space used for mining must be “regular and exclusive.” This means you couldn’t declare space as a home office if you also use this as a kid’s playroom, gym, or entertainment center. So assuming you are a serious bitcoin miner who qualifies as a business, and assuming you have a location considered a “home office” that is devoted entirely to mining, here are expenses you could deduct:
These are the expenses you can write off entirely and are not based on the business percentage use of your home office.
- Mining rig hardware (ASICs, power strips etc.)
- Mining rig support hardware such as shelving units
- Tax preparation and bookkeeping fees
- Mining pool fees or any subscription to software or hardware programs used for mining
- Security cameras to monitor your business
- Fans and A/C unit for business (both actual parts and installation labor)
- Coin storage units such as hardware wallets or USBs
- Any other costs for repairing or maintaining the specific area where mining rigs are located
These are the expenses you can write off based on the percentage of your home office.
- Home security system
- For renters: the percentage of the rent used as your home office
- For homeowners: mortgage interest, real estate tax, homeowner’s insurance, HOA fees if applicable, and some general home repairs
Here’s an example on calculating indirect expenses: let’s say your mining area is 500 square feet and your home is 2,000 square feet. Take your home office and divide this by the total square footage of your home home (500/2,500 = 20%). Then for electricity, take your bills from the date when you started your business during the year, and multiply the total by 20% to get the amount you can deduct.
This article provides some general advice, but determining whether your activity is a hobby or business, whether or not you can take the home office deduction, and what expenses you can deduct can quickly become complex. The good news is there is no need to hire an expensive attorney! Feel free to contact us at the Denver Accounting Group here and we can help you determine the correct taxable treatment for your bitcoin mining.