Are crypto miners at risk?
Solving complex math may not be a favourite activity for many. But when it comes to cryptocurrency mining, people are more than willing to put their systems under work. For any transaction happens via cryptocurrency, miner record these transactions into a block that is added to the blockchain or public record. For this work, miners get rewarded with crypto tokens.
Crypto mining can be attractive because of the rewards but, it also consumes a lot of electricity and time.
Additionally, there are some challenges or risks that miners may face.
- Security issue– By opening your computer for mining, you may be exposing your personal data.
- Volatile income- The rewards are irregular. Since there is no fixed income but constant use of power, the miner may be at a financial loss.
- Slow Down Performance- Personal computer processors aren't built to run heavy software used for mining. It may slow down performance.
Other problems related to mining involve crypto jacking and phishing techniques that add malware to your device when you click on a link. The malware automatically starts mining coins without your consent.
How will I be taxed if I mine cryptocurrencies?
Cryptocurrency is subject to tax if there is a transaction. IRS is concerned with the cryptocurrency used to exchange, sell, purchase, and so on. Mining activity is not taxed, but when it generates cryptocurrency, it is considered a portion of your gross income. Your tax will depend on the fair market value of the currency at the time of mining.
You will also have to pay tax on the mined coins if you sell them to any third party or use them to avail goods and services. It will be considered as a transaction of property. The rate of tax will be similar to business or income tax. So, it will vary from 10-37% of your total income. You pay on the profit you earn.
Say you mined Bitcoins in 2015 when the fair market price was $1000 per coin. You sold them at an inflated value in 2021 at $2500 per coin. You will have to pay tax on the profit amount, which in this case is $1500. Same works for trading on crypto exchanges such as Redot.
How do you lower your crypto mining taxes?
On few occasions, you may be eligible for the deductions except if you are mining only occasionally. It means, if mining is your hobby, it will fall under 'other income'. You cannot avail of the deductions.
But if mining is your profession, you can deduct a few mining costs from your disposable income while filing the tax report.
These may include the following:
- Power expense- Mining is highly power-consuming. The electricity bill amounts can be deducted.
- Space Rent- If you have rented a space for conducting mining activities, you can deduct the rent. If you are using your property for mining work, you have to check your eligibility for deduction.
- Repair cost- If you had to spend on the repairs of the system faults due to mining, that cost can also be deducted. You only have to keep proof like receipts.