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Comment by ar-nelson | Hacker News Reader

I got one of these cheap RX580s in 2019, and, after not really using it for much, proceeded to use it to mine ETH throughout 2021. I was shocked that such an affordable GPU could mine (somewhat) profitably; I did the math, and it seemed like the card would pay for itself if I mined for a few months.

...and then I discovered US crypto taxes, which triggered on every single incremental payout from the mining pool I used (NiceHash). Taxes completely wiped out my mining profits. And now after the merge it won't be profitable to mine ETH again anyway. :/

I'm now trying to get the card to run Stable Diffusion, and I'm having a terrible time with that too, since it's just old enough to not support the latest Linux ROCm driver.

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This doesn't make sense. Your tax on creating the coin is only your marginal tax rate. Even if you had a 37% tax rate that means the other 63% was being eaten by electricity?

Yes, I was making a very small marginal profit after electricity. And the tax rate was around 30% once you combine federal and Massachusetts taxes, I don't remember exactly what it was. And anything I cashed out was double-taxed: first the payout from NiceHash, then the conversion from BTC (what they pay out in) to USD.

> And anything I cashed out was double-taxed

That's not how US taxes work. You're not "double-taxed" because when you sell your coins, you only pay tax on the capital gains i.e. the difference from the original value, which you were already taxed on. (Assuming you correctly and accurately report the sale, that is.)

In other words, each dollar you receive is taxed as income or as capital gains, but not both.

Also, I'm not sure what you mean by triggering taxes "on every single payout". This is no different from a job that's taxed "on every single paycheck" -- all you have to actually report is the total at the end of the year.

That's what I thought too. It didn't make sense at the time, and still doesn't, but the TaxBit forms showed a tax on both the payouts and the BTC->USD transaction. There was probably something I could have done to remove one of them, but I don't know enough about capital gains taxes to figure it out, and paying a professional would have cost as much as the tax I was trying to avoid.

You would get taxed twice, but it wouldn't stack. If you earned $15 of Bitcoin, you'd get $15 added onto your tax bill at payout. Then if Bitcoin jumped to $20 and you sold it a couple months later, you'd have the $5 difference of short-term capital gains taxes added on then.

You often have to correctly document each step (and I don't know if the law is "smart" enough yet to allow you to deduct the electricity charge unless you set the whole thing up as a 'company') and allow it to know the "cost basis" for each step.

When you count your income from mining, you need to create an equal cost basis at that time. The value of the coins when you received them is your cost basis. If you didn't do that, you paid way too much in taxes.

(If you hold them for longer than a year before you sell them, you can be paying long-term capital gains which is cheaper than short-term. Unless you're in losses in which case it doesn't matter.)

Just to clarify: there's no such thing as "US crypto taxes". There are taxes, levied on things like income and capital gains. Crypto transactions can constitute taxable events same as trading any other kind of asset can.

In this case it sounds like this TaxBit software is buggy / not full featured and shouldn't be relied upon. Same applies in some cases to TurboTax also, but you'd think it would be possible to handle such a simple scenario correctly.

IANAL but to my understanding its kind of a stretch to call it double-taxed.

Note: the below is assuming you're doing this mining activity as a private person and not setting it up as a separate legal entity like an LLC or something.

Simplifying, lets say 1BTC==$1USD at time of NiceHash payout, and you received 10 bitcoin. You'd then pay something like your regular income tax rate, lets say 30% on that. So the tax on mining income was $3. You'd still potentially have 10BTC, assuming you paid the tax with other dollars on hand instead of instantly selling.

Then crypto goes up from 1BTC==$1 to 1BTC==$1.50. Your crypto is now worth 10 * 1.5 = $15USD. When you go to sell, you don't pay tax on the full $15 you just pay the tax on the gains, $5. So you'd pay the capital gains tax, probably 15% to you, on that $5 so $0.75USD.

You don't pay the capital gains tax rate on the entire value of your crypto, only the gain in value. So from a USD perspective you didn't get double taxed. You had an income of $10, then you had an "income" of $5 when you realized the gains. That's two different taxable events, not a single one. If you exchanged the BTC to USD immediately at the distribution, you wouldn't of had a capital gains tax as you wouldn't have theoretically experienced any gains/losses on that distribution.

IANAL, this is not tax advice, I am entirely a lay person. If I'm wrong please correct me.

What happens is tax software, unless specifically told (and some will ask) will assign a cost-basis of $0 to something it doesn't know about, which makes the whole $15 appear as a capital gain.

This exactly. Unless you're using a suite that's specifically built for crypto traders, there's no way the software can know that income on day X (which you pay income tax on) is from the same bucket that an asset as was sold later on day Y.

You have to tell the software about your cost basis, which is only a problem if you're mining. It's smart enough to figure out buying and selling on the same platform, but it is not smart enough to figure out that some income was related to later sales and track your cost basis unless you make those connections yourself.

This is why I paid a firm to do my crypto reconciliation... which too costs an arm and a leg.

Yeah if you're in for a penny you're in for a pound as they say. Sometimes I think that most of the algorithms should just go away and we should just trade 10 times a year, from a spreadsheet. Then I remember that those algorithms all came from the primordial spreadsheet soup, and just laugh.

If you listed it as a side business you should also be able to deduct the electricity expense (and the cost of the GPU, depreciated over some expected lifetime) as a business expense against the revenue you made from mining.

You pay income tax on the crypto when you mine it at the market value at the time of mining - then your cost basis becomes the price that you paid (for future gain + loss computations).

The reporting requirement is quite annoying, so for a single card/rig it's probably not worth it - but should still make money.

There shouldn't ever be a case where you have to pay more in tax than you made mining (with one exception: you keep your mining income in crypto and the crypto tanks).

Taxes can't make you lose money. You're taxes are a percent of the profit. That's how it works. You can't be forced into unprofitability because of taxes, but your profits will decrease by whatever percentage of profit your tax rate is.

They don’t factor in the electricity you pay for to get the coin. So when you get your tax bill for $20 of btc, and you paid $15 in electricity to get it, you still owe federal and state taxes on the $20, not the $5. If you set it up as a business you might be able to write off electricity.

See: https://www.bitcointaxsolutions.com/blog/can-i-deduct-mining....

But that's insane. That's.a 37% tax on revenue, not income. Nothing else is taxed like that.

I’m confused, taxes only apply to profit and you can write off the expenses of the video card.

They might not have known that. You’d be surprised how often people say “Taxes completely wiped out my profits becuase I didn’t realize I could deduct my expenses!” Also, in some industries, like marijuana distribution, you really can’t deduct a lot of your expenses.

If it was with a single card there probably isn't enough expense to go over the standard deduction.

Your ability to deduct business expenses using Schedule C has nothing to do with the standard deduction. (And if you don't treat it as a business expense, you probably can't deduct it no matter what.)

That's not how that works. For business expenses you put business income against expenses on schedule C. Only the net income is considered for taxes. Many people think they need to do something special to have a business but you don't. However, it can be a good idea to create a free EIN for the business and maintain real books (using ledger, for example, or by hand) and a separate checking account.

Why not?

I assume we're talking legal distribution else you wouldn't be paying taxes anyway

> else you wouldn't be paying taxes anyway

That's how they get you.

NC sells "unauthorized substance" tax stamps, which you can buy (in theory) anonymously with cash, to pay your taxes on income from illegal distribution.

Mostly it's an excuse to extract money from people who (obviously) didn't pay their drug taxes [1].

[1] https://ncpolicywatch.com/2021/06/28/the-nc-drug-tax-is-desi...

Seriously, there should be a way of challenging a conviction for not paying this tax (or any other tax), if the way to pay the tax is reasonably impossible to use for an average human.

I'd be fine with it if you could buy these stickers at any random store/kiosk/post office (like the tax stamps in Croatia that got phased out last year [1]), if you could mail-order them in advance, or if you could pay them online, and there was a written rule that not just makes it a misdemeanor for DoR staff to forward data, but outright poisons the whole investigation.

[1] https://www.expatincroatia.com/what-is-a-tax-stamp-and-why-d...

The IRS makes it really easy to just say you owe money and pay them, without saying much about why you owe them money. So there really isn't an excuse. I assume the NC system is for state taxes, not federal. For the IRS, you just put some numbers down and they usually won't ask for specific details. Later, if you get caught, the IRS will ask if you paid your taxes, and...if you did, they won't get you for tax evasion.

There is no “legal distribution” of marijuana in federal law, and it’s the federal law that’s most of the tax burden. The federal law simply does not allow you to deduct expenses on marijuana business.

But if you have a business selling whatever, you have expenses. Why does the federal tax agency even care what you're doing to make that money?

I assume federal law doesn't actively say it's illegal, and I assume federal law doesn't exhaustively list what can be an expense or not, so if your business is incurring a legitimate expense?

Further. Who decides what you are selling. Yes it may be marijuana in the box, but if there are other value added things, surely you could argue that that is an incidental ingredient, and you're really selling fancy packaging.

For a country where it's all about free enterprise etc. Things are half made awkward. In the UK if you have a legitimate business expense related to your business you can expense it. And setting up a business basically involves getting a tax number to do your tax return.

It's illegal: https://www.law.cornell.edu/uscode/text/26/280E

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Under federal law, marijuana is Schedule 1. While it is used in medical treatment in some states, this use is not legal federally. https://www.dea.gov/drug-information/drug-scheduling

Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Some examples of Schedule I drugs are: heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote.

Those in the business of selling marijuana are doing so illegally in the hopes the federal government continues to not enforce the law. :(

So they're breaking the law by selling drugs? I assume they aren't paying taxes anyway then?!?

Yes, they are breaking laws by selling drugs. No, they still pay taxes. The reason is that the federal drug enforcement agency that could go after them for breaking the low most likely will not do that, whereas IRS highly likely will go after them for not paying the taxes.

Most countries prevent that dilemma by making the taxation rate of criminally acquired income 100%.

The point is not to actually enforce these laws. If that sounds schizophrenic to you, that's because it is.

If you're not incorporated, business expenses are only deductible if they exceed 2% of AGI[0, p2], so for a hobbyist miner it is quite plausible that they can't write it off.

[0] https://www.irs.gov/pub/irs-pdf/p529.pdf

I recommend using an accountant.

I am not one.

However, my understanding is that all of this might be best handled as a Sole Proprietorship and filed using Schedule C - Profit and Loss from a Business.

Not tax advice

If you're just some average person, no, you aren't writing off the expenses. You should just add it to Schedule 1 line 8z "Other Income" and write "crypto mining" as what it is from. If you're just some average person, the actual tax on that money is going to be something like 10-15%.

You can save a lot of time and effort: If it's not profitable when you pay your taxes, it isn't profitable. It's a hobby.

Not tax advice, but I'm pretty sure you can just file it under a Schedule C as business income, and then you definitely can deduct the expenses from the business income with no 2% minimum.

Quick note since it wasn't totally clear from the sibling comments that this is totally wrong. The cited document is describing a completely different kind of "deduction" for a completely different reason and has nothing at all to do with the ability to "deduct" business costs from profits. The underlying principle is that only profits from business activity are taxable, not gross income.

In case anyone is wondering, the cited document discusses _unreimbursed_ _employee_ expenses. This means something like: you used your guest room as an office to perform remote work for your employer, and they didn't give you any rent for that space. In some times past you could actually pay less tax by declaring that you had rented your guest room to your employer but they hadn't paid you the rent, and so that's now a loss to you upon which you don't pay tax. This document says "nope, you can't do that any more".

> you can write off the expenses of the video card.

As a random person who buys a graphic card to mine coin you can deduct the card price ?

Only if you are a "business" and using it for business purposes. And the IRS has all sorts of things to detect a hobby vs a business - https://www.irs.gov/newsroom/earning-side-income-is-it-a-hob...

So for example if you build a workshop in your garage and start making fine wood items, even if you sell them it may not be a business, and count as a hobby.

Usually the IRS is trying to find people with "perpetually money-losing businesses that are deducting each year" but you could get caught up in some cases.

I’m not a tax avoidance advocate but you really reported your few hundred in mining profits? In similar situations I’d wage 99% of miners don’t report and have never had problems.

You're reasoning for violating the law is that the probability if getting caught is low?

Pretty much everyone uses this mentality with some law.

Ever go 46 MPH in a 45 MPH zone?

Tax evasion and speeding are not in the same category of crime, not even close. One is generally an infraction (not even a misdemeanor) and the other is a felony.

fr speeding can cause injury to others especially when done more than a bit, unless you're a highly trained driver or smth. tax evasion causes no physical harm to anyone.

Evading a few bucks from running numbers on your graphics card is not laundering money to fund trafficking or depriving schools of books.

If it's a rounding error, then they're both negligible crimes.

Worth noting: I also reported a few thousand in trading profits, which were part of the same forms. So I couldn't just ignore crypto entirely on my taxes, and I used TaxBit to autogenerate the forms; it required everything in my transaction history to be accounted for, including all of the mining transactions.

Yeah, this is another reason why so many people are suspicious of the push for "cash like" systems - like cash, they enable tax evasion. Which is one of those things we can each let slide for a bit on small amounts, but when it starts distorting the rest of the market we're not going to put up with.

Same story, bought an RX580 to build a budget gaming box, ended up mining with it to pay for the rig. Electricity in Oregon is pretty cheap, and I optimized well (30Mh/s), but my margins were healthy.

I switched to another pool that paid out less often after realizing the accounting nightmare that nicehash makes. I did make a cost basis tracker, not sure if the APIs still work tho: https://github.com/igmcdowell/nicehash-basis-tracker

As others said, you should pay taxes on the initial value of coins on receipt, but when you convert to fiat you only owe taxes on the change in value since you received it (your cost basis). You might even have a small loss at this point if the value of BTC dipped between receipt and sale.

Usual IANAL/Tax person disclaimer.

> ..and then I discovered US crypto taxes, which triggered on every single incremental payout from the mining pool I used

How much were you earning off a single GPU? Surely low enough to fit under your standard deduction?

There was probably a way I could have figured out how to keep the profits, but because I only made a few hundred from mining, and I had other capital gains (from stocks) that made that whole part of my taxes complicated, it just wasn't worth the effort and the risk of an audit to try to find a loophole. I printed the forms from TaxBit and paid what it said.

People say that US taxes are kept complicated because the tax prep companies profit, or because Republican politicians benefit from frustration at taxes. But I think this is a bigger reason: a lot of people, myself included, when faced with paying extra taxes that just "don't seem right", would rather pay extra that go through the complication of figuring out how to fix them. So the government gets extra tax revenue that they technically didn't require.

> People say that US taxes are kept complicated because the tax prep companies profit, or because Republican politicians benefit from frustration at taxes. But I think this is a bigger reason: a lot of people, myself included, when faced with paying extra taxes that just "don't seem right", would rather pay extra that go through the complication of figuring out how to fix them. So the government gets extra tax revenue that they technically didn't require.

So you think people overpay more commonly when faced with complexity and confusion in the tax code vs. underpaying or not paying at all? Is that right?

Also the confusion you're describing is also what drives your first reason:

> People say that US taxes are kept complicated because the tax prep companies profit

People need to use professional services because they're not sure.

It's pretty well acknowledged that the American tax system is heavily under the influence of lobbyists from tax filing companies like Intuit. You don't see these sorts of problems in other countries for individual or self employment taxes

The tax code is too complex. I've consulted professional tax accountants three times over the last decade. Professionals don't understand it either.

The first one was an oaf in Los Angeles that charged me $500 to redo a back-of-the-envelope calculation I had already done.

The second one was an older lady in Silicon Valley. You would think she would have known how ISOs work, but she messed up the calculations anyway. There were no penalties, but she felt bad enough that she filed my taxes for free. She got cancer and retired 6 months later.

The third was a friend that prepares taxes for billionaires. His retainer is something like $15K per year. His software's calculations disagreed with my homemade spreadsheet by $40K. In April my spreadsheet ended up within a few thousand of TurboTax. He's still kicking himself over that...

If you're working a fulltime job, you're very likely to already be well over the standard deduction. It still sounds like the commenter doesn't fully understand the tax situation and might have paid more than they truly owed, but I can't imagine they'd owe $0 on the profits if they're in the US unless they had minimal other income that year.

In the US, especially absent a large mortgage or significant charitable deductions, it's very possible--even probable--that, given tax changes about five years ago, you're within your standard deduction. I certainly am in a normal year.

I think we're saying different things. If I'm reading correctly, you're saying that most people don't need to itemize and can take the standard deduction, and I certainly agree. I'm saying that OP will need to report even a small amount of income from crypto mining since their income (not itemized deductions) will be more than the standard deduction and the crypto mining will cause them to owe additional income tax.

> which triggered on every single incremental payout from the mining pool I used

I can't really see how small taxes spread out over small pay-outs would be different from a large tax over the total. It's your marginal tax rate anyway.

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