What Is Cryptocurrency Mining?
Mining is the process of validating transactions and adding new blocks to a blockchain. Miners use specialized hardware to solve complex mathematical puzzles (proof of work). When successful, they earn newly minted coins as a reward. This process is fundamental to networks like Bitcoin and Ethereum (before the move to proof of stake).
How Mining Works in Practice
A miner operates hardware—like ASICs or GPUs—to perform proof-of-work calculations. When a block is mined, the miner receives a reward, which includes both newly created coins and transaction fees. For example, mining 2 ETH means the network has issued 2 ETH to your address. The key point: this reward is received at a specific moment—when the block is confirmed and added to the chain.
Tax Implications of Mining Rewards
The IRS has not issued explicit guidance on the tax treatment of mined coins. However, the prevailing view among tax professionals is: the moment you receive the mined coins, you recognize ordinary income equal to their fair market value (FMV) at that time. This FMV is the price of the coin on the day you gain control—usually when the block containing your reward is confirmed.
FMV at Receipt
Suppose you mine 2 ETH on May 15 when ETH is trading at $1,600 per ETH. Your taxable income for that event is $3,200. You should record this as ordinary income at the FMV on that date.
Subsequent Sale
When you sell or otherwise dispose of the mined ETH later, any difference between the sale price and FMV at receipt is a capital gain or loss. For example, if you sell the 2 ETH for $3,200, your gain is zero. But if ETH later appreciates to $2,000 per ETH, and you sell for $4,000, you recognize a $800 long-term or short-term gain depending on holding period.
Mining Pools
Many miners join pools to share resources and rewards. When the pool receives mined coins, it distributes them to participants. Each participant’s taxable event occurs when they receive their share, at the FMV at that time, proportionally. This means pool participants must track their share and FMV precisely.
Common Mining Tax Mistakes
❌ Ignoring FMV at receipt
Why
Many miners think only about when they sell, not when they receive. This leads to underreporting income.
Fix
Record FMV when coins are mined—at block confirmation time.
⚠️ Cost
Potential IRS penalties and interest for unreported income.
❌ Failing to track pool distributions
Why
Mining pools distribute rewards at different times, causing confusion.
Fix
Keep detailed records of your share and FMV at each distribution.
⚠️ Cost
Misreported income, increased audit risk.
❌ Not accounting for subsequent gains or losses
Why
Selling mined coins at different prices affects tax calculations.
Fix
Use proper cost basis and record sale prices accurately.
⚠️ Cost
Overpayment or underpayment of taxes.
How Moonscape Handles Mining Rewards
Moonscape automatically detects mining transactions by analyzing blockchain activity and wallet behavior. When you receive mined coins, it flags the event and records the FMV at that moment. If you are part of a mining pool, Moonscape aggregates your share and assigns the correct cost basis based on the distribution date and FMV.