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Tax Implications of Cryptocurrency Mining

Question Presented

Is cryptocurrency mining similar to mineral mining where recognition of income does not occur until the miner disposes of the mineral in an exchange?

Statement of Facts

In mineral mining, recognition of income occurs only when the miner disposes of the mineral in an exchange. In cryptocurrency mining, the Internal Revenue Service (IRS) requires immediate recognition of income, even if the cryptocurrency has not been converted to a liquid asset.


While cryptocurrency does not include physical mining, cryptocurrency mining involves a miner receiving a reward after successfully verifying a block in the Blockchain. The miner does not receive “income” until their work is converted into a digital asset

In 2014, the IRS issued guidance clarifying the tax implications for cryptocurrency.[1] The IRS requires immediate recognition of income even if the cryptocurrency is not yet converted into traditional currency. Notably, this guidance states:

“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”

 As such, cryptocurrency will be taxed as an capital asset, which requires a taxpayer to determine their basis in the property holding period to determine the correct tax treatment.[2] Additionally, the primary source of discussion is found under question 8 in Notice 2014-21[3], which states the following:

“Q-8: Does a taxpayer who “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger) realize gross income upon receipt of the virtual currency resulting from those activities?”

The IRS Notice answers that, yes, when a taxpayer successfully mines cryptocurrency, the “…fair market value of the virtual currency as of the date of receipt is includible in gross income.”[4]

In contrast, in the mineral mining context, the Internal Revenue Code § 471 (a) General Rule for Inventories provision regarding mining are based on the life cycle of a mining operation.[5] Essentially, it allows for immediate deduction of expenses through the exploration and development stages.[6] Since initial mining efforts is not guaranteed, Congress allows flexibility to taxpayers to deduct expenses associated to with early stages of the process. The development stage includes activities after confirming the existence of minerals in commercially marketable quantities, and can include costs incurred during the development and production stage.[7]


Essentially, when a taxpayer successfully mines cryptocurrency, the taxpayer must include the fair market value of the cryptocurrency on the date of receipt. This recognition of income for cryptocurrency differs from physical mining as discussed above. The IRS holds that physical mining results in inventoried costs and recognition of income occurs at disposition of the commodity in an exchange. Conversely, the IRS requires immediate recognition of income for cryptocurrency even if the miner has not converted it to traditional currency.


[1] IRS. Notice 2014-21 § 4 A-1 (Apr. 14, 2014),

[2] See I.R.C. § 1223 (defining holding period as the length of time from when the asset is acquired to when it is disposed); See also I.R.C. § 1012 (defining basis as as the cost needed to acquire an asset).  If a capital asset is held less than a year, the taxpayer will be taxed at the ordinary rate on this income (short-term capital gain (or loss)). If the holding period is in excess of one year, then gains will be classified as long-term capital gain (or loss). § I.R.C. § 1222.

[3] IRS. Notice 2014-21, supra note 1

[4] Id.

[5] See 26 CFR § 616(a) and 26 CFR § 1.616-1(a).

[6] IRS Market Segment Specialization Program, Placer Mining Industry (2016), available at

[7] U.S. Geological Survey, Mineral Commodity Summaries 2020, Mineral Commodity summaries, (last visited Jan. 27, 2022).