TLDR: Bitcoin (or other cryptocurrency) mining is subject to income tax, typically as ordinary income. Your basis in the coin is the price of the coin at the time it was mined. There are no like-kind exchanges for coins, so selling one coin to buy another is a taxable transaction. Any gains over your basis are capital gains, and may be long term or short term depending on the period of time you held the coin for.
The Wall Street Journal recently reported the IRS is forcing cryptocurrency exchanges to give up names of customers in order to pursue unpaid taxes on mined and arbitraged coins. This reporting is, for many, likely the first they have heard of a tax on cryptocurrency. While there is no cryptocurrency-specific tax, you should consider mining the equivalent of a part-time independent contractor job for tax purposes – your employer is not taking taxes out of your paycheck, and it is your duty to report your earnings. Similarly, the buying and selling of coins is not dissimilar from the buying and selling of stocks. Taxes on ordinary income and capital gains, respectively, will apply.
In 2014 the IRS issued IRS Notice 2014-21, which clarified that a taxpayer that mines crypto currency must take the value of the virtual currency as of the date of mining as gross income. A mined coin is a taxable event and thus carries with it income tax implications. Mining must be voluntarily reported as, in general, successfully mined coins are not reported to a taxing authority in the same way income via employment is.
Selling cryptocurrency, even to purchase another coin, gives rise to another taxable event. The difference between your basis in the original currency and what you sell it for will determine whether you have a capital gain or a capital loss. Capital gains can be either short term or long term, depending on the period of time the asset (here, the coin) had been held. Capital gains will be taxed at the capital gains rate, which differs from ordinary income, and capital losses can be used to offset capital gains with some limits and restrictions.
Deductions can be taken, generally, for costs inherent in mining – things like electricity, equipment, and repairs.
Care must be taken to keep accurate records and report income earned in mining on-time and precisely. This article is not tax advice and is not legal advice. If you reached this page just searching for information and you don’t have a tax issue, I hope it has been helpful. If you believe yourself to owe taxes, don’t rely on information you find on the internet. Consult a tax attorney. If you have any questions feel free to get in contact.