MSTR Cat

Crypto Law/Level II · Tax: the first trap/2.2 Income from crypto/Lesson 1

Mining income

Why newly mined coins are taxed as ordinary income the day they arrive, when mining becomes a business that owes self-employment tax, and what happens when the coins are later sold.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Run mining as a genuine business where the facts support it: Schedule C lets you deduct electricity, pool fees and repairs, while hobby expenses are not deductible at all; the catch is 15.3% self-employment tax from $400 net earnings.
  2. Machines acquired after 19 January 2025 qualify for 100% bonus depreciation under section 168(k) as amended by Pub. L. 119-21, or section 179 expensing up to $2,560,000 for 2026; both require business use.
  3. A mining business can fund a self-employed 401(k): the 2026 elective deferral limit is $24,500 (IR-2025-111), reducing taxable income; the plan must be set up and funded within its deadlines.
  4. Hold mined coins more than one year before selling: basis equals the income already taxed, so only later appreciation is capital gain, potentially at 0% up to $49,450 taxable income (single) in 2026.
  5. Value each payout at receipt from one consistent price source, as Notice 2014-21 requires; free pool exports suffice, and Schedules C and SE are included in Free File Fillable Forms for tax year 2025.

MaterialsIRS Notice 2014-21, questions 8 and 9 on mining (in Internal Revenue Bulletin 2014-16 on irs.gov)Your mining pool’s payout history for the year, with the date, time and amount of each payoutOne price source you apply consistently to value each payout in US dollarsElectricity bills and the purchase receipts for your mining machines

Wonder

  1. If I never sell the coins I mine, do I still owe tax on them?
  2. When does a mining rig at home become a business in the eyes of the IRS?
  3. Can I deduct the electricity and the cost of the machines?

Explore

  1. Mining is the process by which computers compete to add the next block of transactions to a proof-of-work blockchain such as Bitcoin. The winner receives newly created coins, called the block subsidy, plus the transaction fees in that block. Since the halving at block 840,000 on 20 April 2024, the Bitcoin subsidy has been 3.125 BTC per block. For US federal income tax, the IRS answered the basic question in Notice 2014-21, published in April 2014: when a taxpayer successfully mines virtual currency, its fair market value on the date of receipt is included in gross income. Holding the coins instead of selling them does not postpone that tax (lesson 2.1.1).
  2. The income is measured in US dollars at the moment the coins are received. Notice 2014-21 says that where a coin trades on an exchange with a market-set price, the value is found by converting at that rate in a reasonable manner that is consistently applied. Most home miners join a pool, which combines many machines and shares out rewards, often daily. Each payout is a separate income item with its own date and dollar value. The amount included in income becomes your basis in those coins (lesson 2.3.1), and the holding period for any later sale starts on the day of receipt.
  3. Notice 2014-21 also says that if mining is a trade or business, the net earnings are self-employment income subject to self-employment tax. The IRS puts that tax at 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, and requires Schedule SE once net self-employment earnings reach $400. Business mining is reported on Schedule C; the IRS digital-assets page points non-business mining income to Schedule 1. Whether mining is a business depends on the facts. The IRS weighs factors such as businesslike records, time and effort, reliance on the income, the history of profit or loss and the miner’s expertise, and says no single factor decides.
  4. A mining business can deduct its ordinary and necessary expenses, such as electricity, pool fees, hosting and repairs, and generally recovers the cost of machines through depreciation over several years. A hobby is treated very differently. IRS Publication 529 explains that the expenses of an activity not carried on for profit are miscellaneous itemized deductions that can no longer be deducted, while the hobby income itself is still taxable. That mismatch is the trap for small home miners: a hobbyist can owe tax on the full value of the coins received even in a year when the power bill was larger. Keeping the bills matters either way (lesson 2.3.7).
  5. Selling mined coins, swapping them or spending them is a second, separate tax event (lessons 2.1.2, 2.1.3 and 2.1.4). The gain or loss is the difference between what you receive and the basis set when the coins were counted as income, and coins held for more than a year produce long-term gain or loss (lesson 2.3.2). Example: a pool pays 0.01 BTC when bitcoin trades at $60,000, so $600 is ordinary income and the basis is $600. A later sale for $900 gives a $300 capital gain. A sale for $400 gives a $200 capital loss, subject to the capital-loss limits (lesson 2.3.3), rather than cancelling the $600 of income.
  6. Other countries follow a similar two-step pattern, with their own labels. In the United Kingdom, HMRC’s Cryptoassets Manual (page CRYPTO21150) says mining may amount to a trade depending on the degree of activity, organisation, risk and commerciality; if it does not, the sterling value of tokens at receipt is taxed as miscellaneous income, and Capital Gains Tax may apply when they are later disposed of. A practical check for any jurisdiction: export the pool’s payout history, put a value from one consistent price source next to each payout, and confirm that the total matches the mining income on your return. This explains the rules; it is not tax advice.

Key facts

  • IRS Notice 2014-21 says the fair market value of successfully mined virtual currency on the date of receipt is included in gross income.
  • Under Notice 2014-21, net earnings from mining carried on as a trade or business are self-employment income subject to self-employment tax.
  • The IRS states that the self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare.
  • Schedule SE is required when net earnings from self-employment are $400 or more.
  • The dollar amount of mined coins included in income becomes their basis for calculating gain or loss on a later sale.
  • Since the halving at block 840,000 on 20 April 2024, the Bitcoin block subsidy has been 3.125 BTC.

Exercise nine, six, three, one

9CollectList up to 9 facts about a real or hypothetical mining setup that would affect its tax treatment, such as payout frequency, electricity cost, hours spent, records kept, equipment bought and whether coins were sold.
6ClusterSort them into 6 categories: income timing, valuation, business-or-hobby signals, deductible costs, later sales, and records.
3DistillReduce the 6 categories to 3 groups: what creates income, what changes how much tax is due on it, and what proves the numbers.
1CrystallizeWrite 1 sentence explaining why a hobby miner can owe tax in a year when mining cost more than it earned.

Fact check

Dates, figures and claims checked against the published sources listed below.

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