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Mining cryptocurrencies has now become all the rage in the world and cryptocurrencies are believed to be a sure-fire method to secure your future.
People are mining cryptos more than ever, and it seems to be a great way to make some gains as compared to standard investing.
But how does the IRS view cryptocurrency mining, regardless of the cryptocurrency?
Do you have to pay any taxes when your crypto mining ends up in gains? Is the IRS aware that you have crypto in your wallet?
Should You Report the Coins from Crypto Mining?
Crypto mining is taxable, as far as the IRS is concerned. After all, mining still involves a process resulting in payments.
To receive cryptocurrency, you need to solve cryptographic hash functions in order to validate a crypto transaction, and then add it to the Blockchain as a new “coin.”
Cryptos earned by mining are still considered “profit,” which means that they fall under “taxable income.” As a result, you will need to report it under form 1099-NEC, using the market value of the crypto on the day that you received it.
Think of it as self-employment income. Even if you don’t get a form 1099 from your crypto-mining activity, you still need to report it as taxable income.
If you don’t, you might get away from the IRS for a time – but eventually, they will catch up to you.
With cryptocurrencies, it’s much more difficult to hide your mining income, as the wallets are all digital – meaning, they are also in plain sight. If you start making a lot of money, you will likely catch the attention of the IRS, especially if that money is not reported anywhere.
How Does the IRS Know You’re Mining?
It can be very tempting to simply “hide” your cryptos from the IRS – because after all, how will they ever know?
In the past, people could hide behind crypto, as it was not big enough to be written off on tax returns. First movers would often benefit from this, especially if crypto was not yet reported when they began using it.
Nowadays, a crypto transaction will often lead to the release of Form 1099. The issue is that with crypto mining, you would not get that form – so one might think that the IRS does not get the memo on the fact that you just got your hands on some newly made cryptos.
However, things are far from anonymous.
As a taxpayer, you will be expected to report your crypto mining on your tax return. If you don’t, you might end up being charged with cryptocurrency fraud, which is punishable by prison and a big fine.
Any sum that goes higher than $600 is reported to the IRS by the exchange platform, so if the mined crypto goes past that value, there is a good chance that the IRS will find out. Considering one Bitcoin caps at $40,310.14, you can be sure the IRS will be informed if you mine one of these boys.
What Happens If You Don’t Report Your Mining?
Any successful investor knows that there is no shortcut to success. Every business is liable for paying taxes. And despite the popular belief, cryptos are no longer anonymous, and can very well be traced in almost every country.
If you do not report your crypto mining, this leaves you with a trail at the IRS from the crypto exchange and your wallet – so, you cannot get out of it.
Once you ‘conveniently’ skip checking the appropriate boxes in Form 1099, the IRS will likely be on your trail – especially if you start making a big profit from crypto mining.
The more years pass, the more likely you’ll be to face an audit. If you are lucky, you will get away with a fine. If you’re not, you’re looking at a fine and some jail time. Usually, the IRS can help you get off easier if you’re the one reaching out to make the payment before they call an audit on you.
If you don’t, the IRS will know – and the punishment may not be as soft.
So, Do They Know?
Yes, the IRS is fully aware of the fact that you are mining crypto – even if you are technically not filing anything for it.
As a result, to spare yourself the trouble and some possible fines, you might want to do the correct paperwork when reporting your cryptos or filing for tax returns. Otherwise, you might end up with more taxes and payments than you can handle.
No part of this post should be interpreted as tax or investing advice. Consult an experienced tax professional when determining your tax burden.