Right after Bitcoin was launched, the cryptocurrency market just skyrocketed and instantly became an extremely lucrative venture for miners and equally important to maintain decentralized blockchain networks. Investors, traders, and miners have made truckloads of money with cryptocurrencies and hence grabbed the attention of the Internal Revenue Services (IRS). The tax authority originally issued a notice in 2014 addressing crypto taxation, which was later amended in 2019.
It’s no surprise that cryptocurrency is subjected to IRS scrutiny because one of the most important aspects of the crypto market, miners, can make money without buying tokens (given that it requires significant investment upfront). But, is there a way for miners to avoid crypto taxes? At the moment, when miners earn crypto through mining or receive it as a payment for goods or services, they have to pay taxes on the token’s entire fair market value on the day they received it.
Oklahoma To The Rescue
The state of Oklahoma has recently introduced legislation aimed to provide tax incentives to cryptocurrency miners who mine as a business in the region. Oklahoma’s governor Kevin Stitt announced a new crypto mining headquarters in Pryor. After that, state representative Ryan Martinez along with Sen. John Montgomery presented their “Commercial Digital Asset Mining Act of 2022.”
The draft aims to lower commercial mining operations’ hardware and electricity-related expenditure. Furthermore, Montgomery’s bill is going to establish an incentive structure that is meant to draw crypto mining organizations to Oklahoma. The legislation has already been passed by the Oklahoma state on 22nd March and it is moved to the lower chamber on 23rd March followed by the referral to its technology committee on 30th March.
According to commodity.com, Oklahoma is one of the best states for crypto mining. The researchers analyzed several factors such as electricity rates, state income tax burden, cost of living, and avg. internet speed, and more to reach this conclusion. States such as Georgia and Illinois are also aiming for similar measures.
So, it is not completely possible for crypto miners to avoid crypto taxes on mining but they can get tax incentives, which are slowly getting adopted by more and more states in the US.
For Those Who Don’t Know
Miners are critical when it comes to securing crypto networks. Mining requires sophisticated hardware with great computational prowess to solve complicated mathematical puzzles, which are important to validate transactions and add blocks of transactions to the blockchain. The sophisticated hardware is not only expensive but extracts a great toll on electricity charges.
For solving problems and adding blocks to the blockchain, miners receive a reward in the form of the network’s native cryptocurrency. As a result, mining puts the network’s cryptocurrency in circulation while maintaining the integrity of the network.
Tax Implications of Mining
Miners have to pay taxes in two scenarios: when they earn a reward for performing mining activities and when they sell or exchange the earned tokens. According to the IRS notice 2014-21, miners are liable to pay taxes based on the fair market value of the tokens at the time of receipt.
If a miner undertakes mining as a trade/business or as an independent contractor, the rewards received will be considered to be self-employment income and taxed accordingly. Similarly, if a miner performs mining as an employee, payments received will be deemed as wages and taxes accordingly. If a taxpayer hires an independent contractor in exchange for mining services and pays them $600 worth of tokens in return, they will be required to fill the Form 1099.
Mining is a lucrative venture, but it requires a lot of upfront investment. However, miners cannot avoid crypto taxes and have to pay their taxes at the end of every financial year. The good news is that several states in the US are trying to provide tax incentives to miners.
1. How Do I Avoid Paying Taxes on Cryptocurrency?
To avoid crypto taxes you can hold on to it for a long time as long-term capital gains tax is less than short-term capital gains. You can also leverage crypto tax-loss harvesting to save some taxes. You can’t completely avoid taxes but it is a good starting point. Also, you can use crypto tax software which helps you find many ways to save on taxes. It is highly recommended to seek professional help from tax consultants before you file your tax reports.
2. When Do You Have to Pay Taxes on Cryptocurrency?
There are several scenarios where you have to pay taxes such as:
- Selling a token
- Exchanging a token for another token
- Buying goods and services with cryptocurrency
3. Do Different Cryptocurrencies Have Different Tax Rates?
No, taxes on all cryptocurrencies are based on their value in USD at the time the taxable event was triggered.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
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