A recent resurgence in cryptocurrency mining, particularly that of Ethereum, has sparked a new wave of questions regarding the taxability of the mining proceeds. Mining refers to the computational processes performed by computer hardware to validate all of the transactions on Ethereum’s blockchain. Miners are crucial to the integrity, maintenance, and continuation of the blockchain. As a reward for the mining services participants receive units of cryptocurrency. Taxpayers who receive Ethereum and other cryptocurrencies in such a way are subject to income tax. Whenever a Taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.
- A Taxpayer successfully mines 0.10 Ethereum on June 15, 2017.
- On June 15, 2017 the conversion rate between USD and Ethereum was $344.00 for 1.0 Ethereum.
- The Taxpayer would have to include $34.40 as ordinary gross income.
The implications extend beyond gross income as Taxpayers can create scenarios under which the income is also subject to self-employment income. In these scenarios Taxpayers’ activities rise to that of a trade or business. Planning opportunities exist for Taxpayers to minimize the tax implications of mining with reasonable expenses, depreciation, and other cost recovery methods.