Your Crypto Mining Taxes Explained: How to Report Bitcoin Mining

Your Crypto Mining Taxes Explained 

While there are many different ways a U.S. person (for tax purposes) can earn money with cryptocurrency such as Bitcoin, mining has become much more popular in the past several years. From a baseline perspective, the concept of mining is the process of generating coins verifying that certain transactions have occurred on a blockchain. While the intricacies of the process are credibly complicated, the general concept is that mining utilizes various types of hardware and software in order to effectuate a match between cryptographic numbers in conjunction with the transaction. When a person is able to verify the transaction, they are ‘rewarded.’ For example, by verifying various Bitcoin transactions, a miner is rewarded by receiving Bitcoin. The question then becomes how is this bitcoin mining taxed for U.S. tax purposes.

Bitcoin Mining Income – Self-Employed (LLC or S-Corp)

When a person operates their own Bitcoin mining business, chances are that they will be considered to be a self-employed person who is required to file a Form 1040, Schedule C. Some Taxpayers may take an additional step of creating an LLC or an S corporation, but if the person is self-employed and is the only member of the company (or with a spouse) the general framework will be that the taxpayer operates a disregarded entity and includes the income and expenses slash depreciation of equipment, etc on schedule C form 1040. This makes the process relatively straightforward for taxpayers who qualify for the disregarded entity status.

C-Corporation and Bitcoin Mining

If instead of creating an LLC or an S corporation, a Taxpayer creates a C corporation, then they will have to file a corporate tax return as well as their own individual tax return. That is because there is no disregarding a C corporation — and thus, there are two levels of taxation — at the entity level and then the distributions to the shareholders of the company.

Bitcoin Mining as an Employee of a Company

If a Taxpayer is considered to be an employee of a company and is being paid by the company then they would typically report their income similar to how they would report income as any standard employee of a company would do. They would receive a W-2 from their employer(s) and then they would report this on their 1040 as an employee.

Bitcoin Mining as an Independent Contractor

If instead of operating as an employee for a company, a person operates as an independent contractor, then they typically are considered self-employed as well and would have to complete the Schedule of C to report their income and expenses and pay both the employee and employers portion of Social Security withholding/employment taxes. If a person is working for another person to conduct crypto mining, it is important that they work out with the company whether they will be considered an employee or an independent contractor –since the tax ramifications are different depending on the

What About Foreign-Held Crypto?

At Golding & Golding, we specialize in international tax and offshore compliance. Over the past several years, a common question for U.S. taxpayers across the globe is whether or not a foreign-based virtual currency such as Bitcoin that is held overseas is reportable for FBAR (Foreign Bank and Financial Account Reporting) or FATCA (Foreign Account Tax Compliance Act) purposes. To date, the IRS has not yet provided a hard and fast rule as to foreign crypto reporting, but there is an updated FBAR publication and proposed regulations pending. Let’s take a brief look at how foreign virtual currency/virtual currency should be reported for FBAR and FATCA purposes.

FinCEN 114 for Virtual Currency

When virtual currency is being held in a foreign financial account or something similar and there is no other currency (such as euros) held within the account, then the account is generally not reportable. It is important to note, that if there is any currency held within the account outside of virtual currency, then the account may become reportable.

As provided by the IRS in pub 5569:

• • • “Example:

      • A foreign account holding virtual currency is not reportable on the FBAR (unless it’s a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). These funds aren’t reportable at this time, per FBAR regulations issued by FinCEN February 24, 2011, but FinCEN Notice 2020-2 indicates FinCEN’s intention to propose amending the regulations to include virtual currency as a type of reportable account under 31 CFR 1010.350.”

Hybrid Foreign Accounts and FBAR

When an account is only virtual currency, then it does not have to be reported for FBAR at this time — but the same rule does not apply if it is a hybrid account in which it holds reportable assets in addition to virtual currency. For example, if a taxpayer exchanges their foreign virtual currency for pounds or euros within that account, then it may be considered a hybrid account that requires reporting.

FATCA (Form 8938)

FATCA is different than FBAR and can include additional foreign assets that are not reportable for FBAR. For example, a foreign asset that would be reported for FATCA purposes on Form 8938 is an overseas stock certificate — but this same stock certificate would not usually be subject to FBAR reporting unless it was held within an account. The question then becomes whether foreign virtual currency/virtual currency is considered an asset that is reportable on Form 8938. Since virtual currency is considered an asset — and there is no absolute exclusion from having to report virtual currency for FATCA purposes — chances are virtual currency would be a reportable asset on Form 8938.

PFIC (Form 8621)

PFIC refers to Passive Foreign Investment Companies. Many US taxpayers may find themselves subject to the PFIC rules simply because they own foreign mutual funds or other pooled funds. In the past few years, multiple crypto investment funds have been launched both in the US and abroad. And, if a crypto fund qualifies as a PFIC, then Form 8621 would be required (unless an exception, exclusion or limitation applies).

Notice 2020-2

Notice 2020-2 reflects the fact that FinCEN intends to amend regulations requiring virtual currency to be identified as a reportable account for FBAR purposes – and chances the IRS will extend the reporting rule to FATCA/Form 8938 as well.

• • • Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)). For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency). However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.