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Are Bitcoin Miners Required to Pay Self-Employment Tax?

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Are Bitcoin Miners Required to Pay Self-Employment Tax?

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Many Bitcoin miners who first took up an interest in the activity did so out of an earnest and profound interest in the underlying technology and a desire to be an early adopter. However, following the spike in a value of Bitcoin in 2014, individuals who were more motivated by the potential to make money were more likely to engage in substantial operations. However, surprisingly to many individuals, regardless of whether you intended to start a business and make money, you are still subject to self-employment and other taxes when a profit is realized.

Income Earned Is Typically Subject to Either Payroll Taxes or Self-Employment Taxes

Generally speaking, and absent an exception to this rule, all income earned or provided as remuneration for goods or services is subject to tax. When an individual performs work for compensation, they usually do so on one of two bases:  as an employee or as an independent contractor. When a person performs work as an employee, their employer will account for, collect, and pay over payroll and related employment taxes. However, when an individual works as a 1099 independent contractor, the employer will not withhold Social Security, Medicare, or other taxes.

The self-employment tax is intended to account for the fact that 1099 workers do not have these taxes automatically deducted from a paycheck or payment for services. If you have earned income and your employer did not deduct payroll taxes, there is a high likelihood that you are an independent contractor. Independent contractors, in most cases, are required to pay self-employment taxes. Many independent contractors are required to make quarterly tax payments or face a penalty for a failure to make timely payment.

Is your Bitcoin Mining Operation a Business or a Hobby?

Regardless as to whether you consider your bitcoin mining a business or a hobby, you will need to pay self-employment tax when your net self-employment income is greater than $400 in any tax year. However, if the IRS determines that your bitcoin mining activities constitute a business, you may be able to reduce your tax liability through tax deductions and credits for business expenses. This option is not available if the IRS considers your operations to merely constitute a hobby. However, the criteria the IRS uses to determine whether an activity constitutes a for-profit business may produce unexpected results for taxpayers who do not familiarize themselves with the criteria. For instance, any activity that has turned a profit in at least three of the last five tax years, including the current year, is presumed to be a for-profit business whose losses can be used to offset other income.

The fact is regardless of whether you set out to make money or were simply in the right place at the right time, you will need to pay taxes on your income.  Due to the nature of many bitcoin mining operations, there is a reasonable to high likelihood that bitcoin miners are required to pay self-employment taxes.