Mining crypto is taxable income. The IRS treats every block reward, pool payout, and transaction fee as ordinary income at fair market value the second you receive it.

But here's where it gets interesting: how you classify your mining operation determines whether you can deduct expenses — and whether you owe an extra 15.3% in self-employment tax.

Crypto mining triggers two separate tax events:

Example: You mine 0.1 BTC when Bitcoin = $60,000. That's $6,000 of ordinary income — taxable now, whether you sell or not. Later, you sell at $80,000. You owe capital gains on the $2,000 appreciation.

This is the most important decision you'll make as a miner.

The IRS looks at multiple factors to determine if you're running a business:

Rule of thumb: Multiple mining rigs running 24/7 for consistent income = business. One GPU mining casually = hobby.

Hobby miners get the worst of both worlds:

✅ Must report ALL mining income
❌ Cannot deduct ANY expenses
❌ Pay full income tax on gross mining rewards

Example: You mine $8,000 in ETH but spend $5,000 on electricity. As a hobby miner, you owe taxes on the full $8,000. Your $5,000 expense? Not deductible.

If you qualify as a business, these expenses reduce your taxable income:

If you mine from home, you can deduct a portion of:

Calculation: Square footage of mining area ÷ total home square footage × expenses

Warning: "Mixed use" deductions (personal + business) face heavy IRS scrutiny. Keep meticulous records.

Mining hardware is expensive — but the tax code lets you recover those costs.

Deduct the full purchase price of qualifying equipment in the year you buy it.

Example: Buy $15,000 in ASIC miners → deduct the full $15,000 this year.

The One Big Beautiful Bill Act restored 100% bonus depreciation for property placed in service after January 19, 2025.

Strategy: Use Section 179 first (up to income limit), then apply bonus depreciation to remaining equipment costs.

Business miners owe self-employment tax on net mining profits:

Additional Medicare: 0.9% on earnings over $200,000 (single) / $250,000 (married)

Net mining profit: $50,000
Self-employment tax: $50,000 × 15.3% = $7,650
Plus ordinary income tax on the $50,000

Silver lining: You can deduct half of SE tax from gross income.

If you expect to owe $1,000+ in taxes, the IRS requires quarterly payments:

Use Form 1040-ES to calculate and pay.

Pro tip: Set aside 30-35% of mining income as it comes in. Crypto crashes don't erase your tax bill from when prices were high.

Mining pool rewards are taxed identically to solo mining:

Record-keeping nightmare: Multiple daily payouts mean multiple taxable events. Use crypto tax software.

The math usually favors business classification — the ability to deduct electricity, equipment, and overhead typically saves more than the 15.3% SE tax costs.

Track every transaction, document every expense, and consider professional help if you're running a serious operation.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional for advice specific to your situation.

By Ran Chen, EA, CFP®