Crypto Mining Business Accounting: Schedule C or Hobby? (LA Tech Week)

accountant_alice · October 20, 2025, 9:42pm

At LA Tech Week 2025, I attended a surprising session on crypto mining - surprising because I thought mining was dead after Ethereum moved to proof-of-stake. Turns out, Bitcoin mining is BOOMING again, and many accountants’ clients are getting into it.

The tax and accounting implications are complex, and getting the classification wrong (business vs. hobby) can cost clients tens of thousands in taxes.

The Mining Revival: Why Now?

What I learned at LA Tech Week:

Bitcoin mining is profitable again (October 2025):

Bitcoin price: ~$67,000
Mining difficulty: Stabilized after China ban adjustments
Energy costs: Declining (renewable energy adoption)
New ASIC miners: More efficient (Antminer S21, Whatsminer M50S+)

Home mining renaissance:

Small-scale miners (1-5 machines) are back
“Hobby miners” becoming accidental businesses
Many don’t understand tax implications

Result: CPAs dealing with clients who have mining income and NO idea how to report it.

Business vs. Hobby: The $50,000 Question

This is THE critical classification issue for mining.

If Mining = Business (Schedule C)

Advantages:

Deduct ALL ordinary and necessary expenses
Deduct losses against other income (W-2 wages, investment income)
Can carry losses forward/backward
Home office deduction available
Depreciation on mining equipment (Section 179 immediate expensing)

Disadvantages:

Self-employment tax (15.3% on net profit)
Quarterly estimated tax requirements
More complex record-keeping
Higher audit risk

If Mining = Hobby (Schedule 1, Line 8)

Advantages:

No self-employment tax
Simpler record-keeping
Lower audit risk

Disadvantages:

CANNOT deduct expenses (TCJA eliminated misc. itemized deductions)
CANNOT deduct losses
All income taxed, zero deductions
Terrible tax outcome

Example showing the difference:

Mining activity:

Bitcoin mined: 0.5 BTC
Value when mined: $33,500
Electricity costs: $12,000
Equipment depreciation: $8,000
Internet, cooling: $1,500
Total expenses: $21,500

If classified as BUSINESS:

Gross income: $33,500
Expenses: $21,500
Net profit: $12,000
Self-employment tax: $1,797 (15.3% on $12,000 after SE deduction)
Income tax (24% bracket): $2,880
Total tax: $4,677

If classified as HOBBY:

Gross income: $33,500
Expenses: $0 (not deductible)
Net profit: $33,500
Income tax (24% bracket): $8,040
Total tax: $8,040

Difference: $3,363 more tax as hobby!

This is why classification matters.

The 9-Factor Test: Business or Hobby?

IRS uses 9 factors to determine business vs. hobby (IRC Regulation § 1.183-2):

Factor 1: Manner in Which Activity is Carried On

Business indicators:

Maintain complete books and records
Have business plan
Separate business bank account
Business license/permits
Professional appearance

Hobby indicators:

Casual record-keeping
No business plan
Mix personal and business funds
No permits
Amateur approach

My client - BUSINESS:

Beancount ledger tracking all transactions
LLC formed for mining operation
Separate business checking account
Business license obtained
Dedicated mining facility (basement converted)

Factor 2: Expertise of Taxpayer

Business indicators:

Study mining profitability
Attend conferences (LA Tech Week!)
Join mining pools professionally
Hire consultants
Continuous education

Hobby indicators:

Casual knowledge
No research
Set-it-and-forget-it approach

My client - BUSINESS:

Attended LA Tech Week mining sessions
Member of Bitcoin mining forums
Monitors hashrate, difficulty, profitability daily
Reads whitepapers on mining optimization

Factor 3: Time and Effort

Business indicators:

Substantial time devoted
Active management
Regular monitoring
Optimization efforts

Hobby indicators:

Minimal time
Occasional check-ins
Passive activity

My client - BUSINESS:

Spends 10-15 hours/week on mining operations
Daily monitoring of hashrate
Weekly maintenance
Monthly profitability analysis

Factor 4: Expectation of Asset Appreciation

Business indicators:

Primary motivation is current income (not Bitcoin price appreciation)
Would continue even if Bitcoin price stable
Focus on mining profitability metrics

Hobby indicators:

Primary motivation is Bitcoin price speculation
Wouldn’t mine if Bitcoin price drops
Just holding for appreciation

My client - BUSINESS:

Sells Bitcoin monthly to cover expenses (not holding for appreciation)
Mining continues regardless of Bitcoin price
Focus on operational profitability

Factor 5: Success in Similar Activities

Business indicators:

Prior business experience (any field)
History of turning unprofitable ventures into profitable ones
Business acumen demonstrated

Hobby indicators:

No business experience
History of abandoned projects
No demonstrated business skills

My client - BUSINESS:

Owns successful consulting business (demonstrates business acumen)
Turned mining profitable within 6 months
Applied business principles to mining

Factor 6: History of Income or Losses

Business indicators:

Profits in some years
Losses due to startup costs or market conditions (not perpetual losses)
Trend toward profitability

Hobby indicators:

Losses year after year with no expectation of profit
Perpetual losses for 3+ years
No credible plan to become profitable

My client - BUSINESS:

Year 1 (2024): Loss of $15,000 (startup costs)
Year 2 (2025): Profit of $8,000 (operational)
Trend toward profitability: ✓

IRS Safe Harbor: Profits in 3 of last 5 years = presumed business

Factor 7: Amount of Occasional Profits

Business indicators:

Substantial profits relative to investment
Profits exceed losses over time
ROI comparable to other businesses

Hobby indicators:

Trivial profits
Losses far exceed profits
No realistic ROI

My client - BUSINESS:

Initial investment: $35,000 (equipment)
Year 1 loss: $15,000
Year 2 profit: $8,000
Projected Year 3 profit: $18,000
ROI trajectory: Positive

Factor 8: Financial Status of Taxpayer

Business indicators:

Taxpayer depends on income from activity
Primary or significant income source
Taxpayer needs the income

Hobby indicators:

Taxpayer wealthy with other income sources
Mining income trivial relative to other income
Clearly doing it for enjoyment, not income

My client - CAUTION:

W-2 income: $180,000/year (high earner)
Mining income: $8,000 (4% of total income)
Does NOT depend on mining income

This factor weighs AGAINST business classification.

However: This factor alone doesn’t disqualify business treatment. High-income individuals can still have legitimate side businesses.

Factor 9: Elements of Personal Pleasure

Business indicators:

Activity is tedious, labor-intensive
Not particularly enjoyable
Done purely for profit

Hobby indicators:

Activity is fun, recreational
Primary motivation is enjoyment
Would do it even without profit

My client - MIXED:

Mining itself is NOT fun (noisy, hot, requires maintenance)
BUT enjoys learning about Bitcoin technology
Motivation: 70% profit, 30% interest in technology

Overall assessment: 7 of 9 factors favor BUSINESS classification

My Client Case Study: Home Bitcoin Mining

Client: Software engineer, age 35
W-2 income: $180,000/year
Started mining: January 2024

Mining setup:

4× Antminer S19 XP miners
Total hashrate: ~560 TH/s
Location: Dedicated basement room (500 sq ft)
Power: 240V dedicated circuits, 14 kW capacity
Cooling: Industrial exhaust fans + AC

Initial investment (2024):

Mining equipment: $28,000 (4 miners @ $7,000 each)
Electrical work: $4,500 (dedicated circuits, safety upgrades)
Cooling equipment: $2,500
Mining pool fees (prepaid): $500
Total: $35,500

Year 1 (2024) Results:

Bitcoin mined: 0.42 BTC
Average BTC price when mined: $45,000
Gross income: $18,900
Electricity: $16,800 (14 kW × $0.12/kWh × 24 hrs × 350 days)
Depreciation: $11,200 (MACRS 5-year, 40% year 1)
Repairs/maintenance: $1,200
Internet: $720
Mining pool fees: $945 (5% of proceeds)
Home office (500 sf of 2,000 sf home): $3,750
Total expenses: $34,615
Net loss: ($15,715)

Year 2 (2025, projected):

Bitcoin mined: 0.35 BTC (difficulty increased)
Average BTC price: $65,000
Gross income: $22,750
Electricity: $17,500 (rate increased to $0.125/kWh)
Depreciation: $8,960 (MACRS year 2)
Repairs/maintenance: $800
Internet: $720
Mining pool fees: $1,138
Home office: $3,900
Total expenses: $33,018
Net profit: ($10,268) (WAIT - still a loss!)

Revised: Client upgraded to more efficient miners mid-year:

Additional 2× S21 miners: $15,000
Increased hashrate to 840 TH/s
Electricity same (more efficient)
Additional BTC: 0.15 BTC @ $67,000 = $10,050
Actual gross income: $32,800
Actual net profit: $7,282

Tax classification: Schedule C (Business)

Beancount Ledger for Mining Business

Here’s how I’m tracking this client’s mining operation:

Chart of accounts:

; Income accounts
2024-01-01 open Income:Mining:Bitcoin            USD
2024-01-01 open Income:Mining:PoolRewards        USD

; Asset accounts
2024-01-01 open Assets:Mining:Equipment          USD
2024-01-01 open Assets:Mining:AccumulatedDepr    USD
2024-01-01 open Assets:Crypto:Bitcoin:Mined     BTC

; Expense accounts
2024-01-01 open Expenses:Mining:Electricity      USD
2024-01-01 open Expenses:Mining:PoolFees         USD
2024-01-01 open Expenses:Mining:Internet         USD
2024-01-01 open Expenses:Mining:Repairs          USD
2024-01-01 open Expenses:Mining:HomeOffice       USD
2024-01-01 open Expenses:Mining:Depreciation     USD

Equipment purchase:

2024-01-15 * "Purchase Antminer S19 XP" #mining-equipment
  purchase_count: 4
  cost_per_unit: 7000.00
  total_cost: 28000.00
  asset_class: "MACRS_5year"
  section_179_eligible: true
  Assets:Mining:Equipment           28000.00 USD
  Liabilities:CreditCard           -28000.00 USD

Monthly mining reward:

2024-10-31 * "Bitcoin Mining Reward - October" #mining-income
  btc_mined: 0.035
  btc_usd_rate: 68500.00
  gross_income: 2397.50
  pool_fee_pct: 0.05
  pool_fee_usd: 119.88
  net_btc_received: 0.03325
  Income:Mining:Bitcoin             -2397.50 USD
  Assets:Crypto:Bitcoin:Mined       0.03325 BTC @ 68500.00 USD
  Expenses:Mining:PoolFees           119.88 USD

Monthly electricity:

2024-10-31 * "Mining Electricity - October" #mining-expense
  kwh_used: 10080  ; 14 kW × 24 hrs × 30 days
  rate_per_kwh: 0.125
  mining_portion: 1260.00
  household_portion: 120.00
  total_bill: 1380.00
  Expenses:Mining:Electricity       1260.00 USD
  Expenses:Personal:Utilities        120.00 USD
  Liabilities:CreditCard           -1380.00 USD

Annual depreciation:

2024-12-31 * "Mining Equipment Depreciation - Year 1" #depreciation
  equipment_cost: 28000.00
  macrs_year1_rate: 0.20  ; 20% for 5-year property
  bonus_depreciation: 0.00  ; Not taking bonus
  depreciation_amount: 5600.00
  Expenses:Mining:Depreciation       5600.00 USD
  Assets:Mining:AccumulatedDepr     -5600.00 USD

Section 179 election (alternative):

; Instead of MACRS, could elect Section 179 immediate expensing
2024-12-31 * "Section 179 Expensing - Mining Equipment" #section179
  equipment_cost: 28000.00
  section_179_limit: 1220000.00  ; 2024 limit
  amount_expensed: 28000.00
  Expenses:Mining:Equipment:Section179  28000.00 USD
  Assets:Mining:Equipment              -28000.00 USD

Quarterly estimated tax payment:

2025-09-15 * "Q3 2025 Estimated Tax - Mining Income" #estimated-tax
  net_mining_profit_ytd: 7282.00
  estimated_tax_rate: 0.40  ; Fed + SE + State
  q3_payment: 2913.00
  Expenses:Taxes:Estimated           2913.00 USD
  Assets:Checking                   -2913.00 USD

Home office deduction:

2025-12-31 * "Home Office Deduction - Mining" #home-office
  total_home_sqft: 2000
  mining_room_sqft: 500
  business_use_pct: 0.25
  annual_mortgage_interest: 12000.00
  annual_property_tax: 6000.00
  annual_insurance: 1800.00
  annual_utilities: 3600.00
  annual_maintenance: 2400.00
  total_home_expenses: 25800.00
  business_portion: 6450.00
  Expenses:Mining:HomeOffice         6450.00 USD
  Assets:Personal:Home:Basis        -6450.00 USD  ; Reduces home basis

Tax Reporting: Schedule C

Form 1040, Schedule C:

Part I: Income

Line 1: Gross receipts: $32,800 (Bitcoin mined at FMV)

Part II: Expenses

Line 8: Depreciation: $8,960
Line 11: Contract labor: $0
Line 25: Utilities: $17,500 (electricity)
Line 30: Home office: $6,450
Line 48: Total expenses: $33,018

Part III: Cost of Goods Sold

(Not applicable for mining)

Result:

Net loss: ($218) → Shows on Schedule 1, Line 3
Self-employment tax: $0 (no profit)
Loss reduces other income (W-2 wages)

Tax savings from loss:

Loss offsets $218 of W-2 income
Tax savings: $78 (24% bracket × $218)

But this is Year 2 - showing path to profitability.

The Self-Employment Tax Surprise

Clients often don’t realize mining income = self-employment income.

If mining net profit = $20,000:

Self-employment tax calculation:

Net profit: $20,000
SE tax rate: 15.3% (12.4% Social Security + 2.9% Medicare)
SE tax deduction: $1,413 (50% of SE tax)
Taxable SE income: $18,587
SE tax: $2,826

Plus regular income tax:

$20,000 ordinary income at 24% bracket: $4,800
Total tax: $7,626 (38% effective rate)

Many clients shocked by this.

Equipment Depreciation: MACRS vs. Section 179

Critical tax planning decision:

MACRS (Modified Accelerated Cost Recovery System)

5-year property for mining equipment

Depreciation schedule (for $28,000 equipment):

Year 1: 20% = $5,600
Year 2: 32% = $8,960
Year 3: 19.2% = $5,376
Year 4: 11.52% = $3,226
Year 5: 11.52% = $3,226
Year 6: 5.76% = $1,613

Pros:

Spreads deduction over 6 years
Matches economic depreciation
Preserves Section 179 for other assets

Cons:

Slower tax benefit
Risk that mining becomes unprofitable before fully depreciated

Section 179 Immediate Expensing

Expense up to $1,220,000 (2025 limit) in Year 1

For $28,000 equipment:

Year 1: 100% = $28,000
Years 2-6: $0

Pros:

Immediate tax benefit
Larger Year 1 loss (can offset W-2 income)
Accelerates deductions before law changes

Cons:

Uses up Section 179 limit
If mining income low, “wastes” deduction (can’t carry forward)
Recapture if sell equipment or convert to personal use

My recommendation for most clients: Section 179 if:

Have other income to offset (W-2, business income)
Equipment expensive ($20K+)
Want immediate cash flow benefit

Use MACRS if:

Mining income high enough to use depreciation
Want to preserve Section 179 for other assets
Expect mining to continue 5+ years

The Hobby Loss Rules: What Triggers Audit?

IRS looks for patterns suggesting hobby, not business:

Red flags:

Losses every year for 5+ years (no profitability)
High W-2 income with mining losses (tax shelter appearance)
Expensive equipment disproportionate to income generated
No business plan or records
Activity looks recreational (GPU gaming rigs “also used for mining”)
No separate business bank account
Mining income trivial ($500/year) but claiming $5,000 expenses

How to avoid audit:

Maintain detailed records:
- Beancount ledger (or equivalent)
- Receipts for all expenses
- Business plan with profitability projections
- Time logs showing hours devoted
Separate business from personal:
- Dedicated mining space (not gaming room)
- Business bank account
- Business credit card
- LLC or sole proprietorship
Show profit motive:
- Sell Bitcoin to cover expenses (not just HODLing)
- Adjust operations to increase profitability
- Shut down if unprofitable (or document reasons for continuing)
Be profitable in 3 of 5 years:
- Safe harbor presumption
- Losses in startup years acceptable
- But must show trend toward profit

Questions for the Community

For accountants: How are you advising clients on business vs. hobby classification for small-scale mining (1-2 machines)?
For tax pros: Section 179 vs. MACRS for mining equipment - what’s your default recommendation?
For Beancount users: How are you tracking the electricity allocation between mining and personal use?
Has anyone had mining clients audited? What did IRS focus on?
For everyone: With Ethereum now proof-of-stake, is GPU mining (altcoins) ever profitable enough to justify business treatment?

My Bottom Line

Crypto mining taxation is complex:

Business vs. hobby classification is critical ($3,000+ tax difference)
Self-employment tax surprises clients (38% effective rate)
Equipment depreciation requires planning (MACRS vs. Section 179)
Home office deduction valuable but requires documentation
Record-keeping essential for audit defense

My standard advice:

Treat as business if serious and profitable (or path to profitability)
Maintain meticulous records (Beancount ledger)
Separate business from personal completely
Pay quarterly estimated taxes
Plan for self-employment tax (not just income tax)

The LA Tech Week mining discussion convinced me: Bitcoin mining is back, and accountants need to understand the tax implications.

Alice Thompson, CPA
Thompson & Associates

P.S. - I’ve created a “Mining Business Classification Worksheet” (9-factor analysis) and “Mining Business Beancount Template” for clients. If there’s interest, happy to share.

Key Sources:

LA Tech Week 2025 (October 13-19)
IRC Regulation § 1.183-2 (Activity not engaged in for profit)
IRS Publication 535 (Business Expenses)
IRC § 179 (Election to Expense Depreciable Assets)
MACRS depreciation tables (IRS Publication 946)

tax_tina · October 20, 2025, 9:42pm

Alice, this is incredibly timely. I have THREE mining clients right now, and all three are terrified of hobby loss audits. Let me add the IRS examination perspective and audit defense strategies.

What IRS Examiners Look For in Mining Audits

I’ve represented 2 clients in mining audits (one hobby loss challenge, one SE tax examination). Here’s what IRS focuses on:

Audit Focus #1: The “Too Good to Be True” Loss Pattern

What triggers audit:

High-income taxpayer ($200K+ W-2)
Mining losses year after year
Losses perfectly offset other income
Suspicious pattern: Just enough loss to reduce tax bracket

Real example:

Client: Doctor, $400K/year W-2 income

2022: Mining loss $15,000
2023: Mining loss $18,000
2024: Mining loss $22,000
Pattern: Losses increasing each year (red flag)

IRS examiner’s question:
“If you’re losing more money each year, why do you continue? This looks like a tax shelter, not a business.”

Client’s answer (poor):
“I believe in Bitcoin’s future. I’m willing to take losses now for long-term gains.”

IRS response:
“That’s speculation/investment, not business. Hobby loss rules apply.”

Result:

$55,000 of losses disallowed
Additional tax: $19,800 (36% bracket)
Interest: $3,240
Accuracy penalty: $3,960 (20%)
Total: $27,000 owed

What went wrong:
Client couldn’t demonstrate profit motive - primary motivation was Bitcoin appreciation, not mining operations.

Audit Focus #2: Home Office Deduction

Alice mentioned 500 sq ft mining space = 25% of home.

IRS scrutiny factors:

Exclusive use test:
- Is space ONLY used for mining?
- Or is it “mining corner of game room”?
- IRS will ask to see photos
Regular use test:
- Is mining continuous (24/7)?
- Or occasional (when you feel like it)?
Principal place of business:
- Is this your only business?
- Or do you have other businesses with offices?

Real audit example:

Client claimed home office:

400 sq ft basement room
4 mining rigs
Also: Gaming PC, TV, couch, bar

IRS examiner visit:

Took photos showing personal items
Asked: “Do you play video games here?”
Client: “Yes, sometimes…”
Examiner: “Not exclusive business use. Disallowed.”

Result:

$4,500 home office deduction disallowed
Additional tax: $1,620

How to defend:

ONLY mining equipment in space
No personal items (no TV, games, furniture)
Photos showing dedicated business space
Locked door (restricted access)

Audit Focus #3: Electricity Expense

This is the LARGEST mining expense, and IRS examines it closely.

IRS questions:

How did you determine mining vs. household electricity?
Do you have separate meter?
Can you prove allocation percentage?

Weak documentation (disallowed):
“I estimated mining uses 80% of my electricity.”

Strong documentation (allowed):

Manufacturer specs: Miner uses 3,250W
4 miners × 3,250W = 13,000W (13 kW)
Hours operated: 24 hours/day × 350 days = 8,400 hours
Mining kWh: 13 kW × 8,400 hours = 109,200 kWh
Total household kWh (from bills): 125,000 kWh
Mining percentage: 87.4%
Electric bill: $15,625 total
Mining portion: $13,656 (87.4%)

Supporting documentation:

All electric bills
Manufacturer spec sheets
Monitoring software screenshots (showing uptime)
Photos of dedicated circuits

Audit Focus #4: Section 179 Expensing

Alice mentioned Section 179 immediate expensing. IRS watches for abuse.

Section 179 requirements:

Property used >50% for business
Purchased and placed in service in tax year
Used in active trade or business (not investment)

Common Section 179 abuse:

Example:

Client buys $50,000 in mining equipment December 28
Places in service December 30 (mines for 2 days)
Claims $50,000 Section 179 deduction
Equipment generates $200 income in tax year
IRS: “This is abusive. You’re expensing $50K for 2 days of use.”

Result:

Section 179 disallowed
Must use MACRS depreciation instead
Year 1 depreciation: $10,000 (20% MACRS)
Lost $40,000 deduction

How to avoid:

Place equipment in service early in year (not December)
Generate substantial income in year of purchase
Document business purpose and immediate use

The 3-of-5-Years Profitability Safe Harbor

Alice mentioned this. Let me explain exactly how it works:

IRC § 183(d): Presumption of Profit Motive

If activity profitable in 3 of last 5 consecutive years → Presumed to be business (not hobby).

Burden shifts to IRS:

Taxpayer doesn’t have to prove profit motive
IRS must prove activity is hobby
Very hard for IRS to overcome presumption

Example:

Mining results:

2021: Profit $8,000
2022: Loss ($12,000) - equipment purchase
2023: Profit $5,000
2024: Profit $3,000
2025: Loss ($6,000)

3 profitable years out of 5 → Safe harbor applies

Even though 2025 shows loss, activity presumed to be business.

Important timing:

You can elect to defer determination until 5th year:

Form 5213: Election to Postpone Determination

File with Year 1 return
IRS won’t audit under hobby loss rules until Year 5
Gives you time to demonstrate profitability

When to file:

Year 1 shows large loss
You expect profitability in Years 2-5
Want to defer audit until you can demonstrate pattern

Downside:

Extends statute of limitations
IRS can look at all 5 years at once
If you don’t achieve 3 profitable years, adjustment applies to all 5 years (with interest)

Self-Employment Tax: The Hidden Surprise

Alice mentioned 15.3% SE tax. Let me add the details taxpayers miss:

SE tax applies to mining income even if reported as hobby.

Wait, that seems wrong. Let me clarify:

If hobby:

Income reported on Schedule 1, Line 8
NOT subject to SE tax (correct)
But expenses not deductible (huge problem)

If business:

Income reported on Schedule C
Subject to SE tax (15.3%)
Expenses fully deductible

The calculation trap:

Scenario: $30,000 mining income, $25,000 expenses

As business:

Net profit: $5,000
SE tax: $707 (15.3% × [$5,000 × 0.9235])
Income tax on $5,000 - $353 (SE tax deduction) = $4,647
Income tax (24% bracket): $1,115
Total tax: $1,822

As hobby:

Gross income: $30,000
Expenses: $0 (not deductible)
Income tax (24% bracket): $7,200
Total tax: $7,200

Difference: $5,378 more tax as hobby!

Even with SE tax, business treatment is FAR better.

Audit Defense: Documentation Requirements

When IRS audits mining operation, they want to see:

1. Business Plan

Must include:

Executive summary (what is the business?)
Market analysis (Bitcoin mining profitability trends)
Financial projections (3-5 years)
Operations plan (how many miners, when to scale)
Break-even analysis
Path to profitability

Sample excerpt:

"ABC Mining LLC: Business Plan

Mission: Operate profitable Bitcoin mining operation generating $40K annual net income by Year 3.

Year 1 (2024): Startup phase, net loss expected ($15K) due to equipment purchases
Year 2 (2025): Break-even expected ($0-$5K profit)
Year 3 (2026): Profitable operations ($20K+ profit)

Key metrics:

Bitcoin difficulty (monitor monthly)
Electricity costs (optimize via renewable sources)
Equipment efficiency (upgrade when ROI positive)
Mining pool selection (lowest fees)

This business plan demonstrates PROFIT MOTIVE (not hobby)."

2. Time Logs

Track hours devoted to mining:

October 2025 Time Log - ABC Mining LLC

10/1: 2 hours - Monitor hashrate, adjust pool settings
10/2: 1 hour - Review profitability metrics
10/3: 3 hours - Repair fan on Miner #3
10/4: 1 hour - Daily monitoring
10/5: 2 hours - Research electricity rate optimization
...
TOTAL OCTOBER: 45 hours

Why this matters:

Demonstrates active business (not passive investment)
Shows substantial time and effort (9-factor test)
Supports business classification

3. Separate Bank Account

Required for audit defense:

Business checking account (not personal)
All mining income deposited to business account
All mining expenses paid from business account
NO mixing of personal and business funds

IRS will request bank statements.

If personal expenses mixed with business → Red flag.

4. Profit & Loss Statements

Prepare monthly P&L:

ABC Mining LLC - Profit & Loss Statement
October 2025

INCOME:
  Bitcoin mining rewards         $2,850.00

EXPENSES:
  Electricity                    $1,450.00
  Internet                          $60.00
  Pool fees                        $142.50
  Repairs & maintenance            $150.00
  Depreciation                     $746.67
  Home office                      $537.50
  TOTAL EXPENSES                 $3,086.67

NET LOSS                          ($236.67)

YTD Net Profit: $4,825.00

IRS wants to see:

Monthly financial tracking (not just annual)
Trend toward profitability
Active management decisions based on financials

5. Equipment Records

Maintain fixed asset ledger:

Asset	Purchase Date	Cost	Method	Useful Life	Accumulated Depreciation	Book Value
Antminer S19 XP #1	1/15/2024	$7,000	MACRS 5-yr	5 years	$2,240	$4,760
Antminer S19 XP #2	1/15/2024	$7,000	MACRS 5-yr	5 years	$2,240	$4,760
Antminer S19 XP #3	1/15/2024	$7,000	MACRS 5-yr	5 years	$2,240	$4,760
Antminer S19 XP #4	1/15/2024	$7,000	MACRS 5-yr	5 years	$2,240	$4,760

Supporting docs:

Purchase receipts
Manufacturer specs
Warranty information
Photos of equipment

State Tax Considerations

Don’t forget: States can have different rules.

States with specific crypto mining rules:

New York

Mining income = business income (subject to NY corporate tax if LLC)
SE tax applies (same as federal)
Home office deduction allowed

California

Mining income = business income
Subject to CA SE tax (same rate as federal)
Home office deduction: PARTIALLY allowed (CA has stricter rules)

Texas

No state income tax (WIN!)
But franchise tax if LLC with >$1.23M revenue
Most home miners exempt

Montana

Crypto mining tax incentive (0.3% infrastructure tax)
Special treatment for renewable energy miners
Home office deduction allowed

Questions for Alice

Alice: For your client with Year 1 loss ($15K) and Year 2 profit ($7K), are you filing Form 5213 to defer hobby loss determination?
For your home office deduction: Did you document exclusive business use with photos? IRS will want to see this in audit.
Section 179 vs. MACRS: Why did you choose MACRS? Was it to preserve Section 179 for other assets, or to match income recognition timing?
Your 9-factor analysis is excellent. Are you providing written analysis to client as audit defense documentation?

My Mining Audit Defense Checklist

When client facing mining audit, I gather:

Documents required:
✓ Business plan (written, dated)
✓ Time logs (all years under audit)
✓ Bank statements (business account)
✓ All receipts (equipment, electricity, repairs)
✓ Fixed asset ledger
✓ Monthly P&L statements
✓ Photos of mining space (showing exclusive use)
✓ Electric bills with calculations
✓ Mining pool statements
✓ Manufacturer spec sheets
✓ Form 5213 (if filed)
✓ Professional advisor correspondence

Without these docs: Audit defense is nearly impossible.

My Bottom Line

Mining hobby loss audits are increasing (IRS sees pattern of high-income taxpayers with mining losses).

Keys to audit defense:

Document profit motive from Day 1
Maintain complete business records
Show path to profitability (3-of-5-years safe harbor)
Separate business from personal completely
Be prepared to defend 9-factor analysis

Red flags to avoid:

Perpetual losses with no profit plan
Personal use mixed with business use
Weak documentation
Primary motivation is Bitcoin speculation (not mining operations)

Alice’s client looks solid: 7 of 9 factors favor business, trend toward profitability, meticulous records.

Tina Chen, EA
Tax Specialist

P.S. - I’m drafting “Mining Audit Defense Documentation Checklist” and “Form 5213 Election Guide.” If interest, will share with community.

bookkeeper_bob · October 20, 2025, 9:42pm

Alice and Tina - thank you for the comprehensive analysis! As a bookkeeper, I’m dealing with the day-to-day tracking challenges. Let me share practical implementation tips and my Beancount workflow.

My Mining Client Reality Check

I have 2 mining clients:

Client A: 1 ASIC miner (hobby or business? Unclear)
Client B: 10 GPU miners (definitely business, LLC formed)

The tracking challenges are REAL.

Challenge #1: Daily Mining Rewards

Mining pools pay out daily (or more frequently). Tracking is tedious.

Client B example (October 2025):

31 days of mining
31 separate payout transactions
Amounts vary ($85-$110 per day)
Total: $2,987 for month

Option 1: Track each transaction individually

2025-10-01 * "Mining Reward" #mining-income-daily
  btc_mined: 0.00125
  btc_usd_rate: 68000.00
  income: 85.00
  Income:Mining:Bitcoin           -85.00 USD
  Assets:Crypto:Bitcoin:Mined   0.00125 BTC @ 68000.00 USD

2025-10-02 * "Mining Reward" #mining-income-daily
  btc_mined: 0.00132
  btc_usd_rate: 67500.00
  income: 89.10
  Income:Mining:Bitcoin           -89.10 USD
  Assets:Crypto:Bitcoin:Mined   0.00132 BTC @ 67500.00 USD

[...repeat for all 31 days]

Pros: Precise tracking, clear audit trail
Cons: 31 manual entries per month = 372 per year (exhausting)

Option 2: Aggregate monthly

2025-10-31 * "Mining Rewards - October Summary" #mining-income-monthly
  days_mined: 31
  btc_mined_total: 0.0435 BTC
  average_btc_rate: 68666.67
  gross_income: 2987.00
  pool_fees: 149.35
  net_btc_received: 0.041325 BTC
  Income:Mining:Bitcoin            -2987.00 USD
  Assets:Crypto:Bitcoin:Mined     0.041325 BTC @ 68666.67 USD
  Expenses:Mining:PoolFees          149.35 USD

Pros: Much simpler (12 entries per year vs. 365)
Cons: Less precise, harder to match to pool statements

My approach: Option 2 (monthly summary) for small miners, Option 1 (daily) only if required for audit.

Supporting documentation:

Export CSV from mining pool monthly
Calculate monthly average BTC price
Reconcile to pool statement

Challenge #2: Electricity Allocation

Alice and Tina covered the allocation formula. Here’s my practical tracking:

Monthly electricity entry:

2025-10-31 * "Electricity Bill - October" #utilities
  total_bill: 1685.00
  total_kwh: 13480
  rate_per_kwh: 0.125

  ; Mining calculation
  miner_wattage_total: 13000  ; 10 miners × 1300W each
  mining_hours: 744  ; 31 days × 24 hours
  mining_kwh: 9672  ; 13 kW × 744 hours
  mining_pct: 0.7175  ; 9672 / 13480
  mining_amount: 1209.00  ; $1685 × 71.75%

  ; Household remainder
  household_pct: 0.2825
  household_amount: 476.00

  Expenses:Mining:Electricity      1209.00 USD
  Expenses:Personal:Utilities       476.00 USD
  Liabilities:CreditCard          -1685.00 USD

Key: Document the calculation in metadata. IRS will want to see your math.

Supporting docs I maintain:

Manufacturer spec sheets (showing wattage)
Mining monitoring software screenshots (showing uptime %)
Electric bills (all 12 months)
Calculation worksheet

Challenge #3: Equipment Depreciation Tracking

Alice showed annual depreciation entry. Here’s my full fixed asset ledger in Beancount:

Initial setup:

; Define plugin for depreciation
plugin "beancount.plugins.depreciation" "
  Assets:Mining:Equipment
  Assets:Mining:AccumulatedDepreciation
  Expenses:Mining:Depreciation
"

; Commodity for mining equipment tracking
2024-01-01 commodity MINER
  name: "ASIC Mining Equipment"

; Equipment purchases
2024-01-15 * "Purchase Mining Equipment" #equipment ^purchase-001
  assetid: "MINER-001"
  description: "Antminer S19 XP - Serial ABC123"
  cost: 7000.00
  depreciation_method: "MACRS_5year"
  placed_in_service: 2024-01-20
  Assets:Mining:Equipment:MINER001     7000.00 USD
  Liabilities:CreditCard              -7000.00 USD

2024-01-15 * "Purchase Mining Equipment" #equipment ^purchase-002
  assetid: "MINER-002"
  description: "Antminer S19 XP - Serial DEF456"
  cost: 7000.00
  depreciation_method: "MACRS_5year"
  placed_in_service: 2024-01-20
  Assets:Mining:Equipment:MINER002     7000.00 USD
  Liabilities:CreditCard              -7000.00 USD

[...repeat for all miners]

MACRS depreciation schedule (built-in or manual):

Year 1 (2024):

2024-12-31 * "Depreciation - MINER-001" #depreciation
  cost_basis: 7000.00
  macrs_rate_year1: 0.20
  depreciation: 1400.00
  Expenses:Mining:Depreciation                    1400.00 USD
  Assets:Mining:AccumulatedDepr:MINER001         -1400.00 USD

Year 2 (2025):

2025-12-31 * "Depreciation - MINER-001" #depreciation
  cost_basis: 7000.00
  macrs_rate_year2: 0.32
  depreciation: 2240.00
  Expenses:Mining:Depreciation                    2240.00 USD
  Assets:Mining:AccumulatedDepr:MINER001         -2240.00 USD

Beancount query to see asset book value:

SELECT
  account,
  sum(position) AS total_cost,
  sum(accumulated_depr) AS total_depreciation,
  sum(position) - sum(accumulated_depr) AS book_value
WHERE account ~ 'Mining:Equipment'
GROUP BY account

Challenge #4: Home Office Percentage

Tina emphasized exclusive business use. Here’s my tracking:

Annual home office entry:

2025-12-31 * "Home Office Deduction - 2025" #home-office
  ; Space calculation
  total_home_sqft: 2400
  mining_room_sqft: 500
  business_pct: 0.2083  ; 500 / 2400

  ; Direct expenses (100% business)
  mining_room_ac: 650.00  ; Window AC unit ONLY for mining room
  mining_room_ventilation: 400.00  ; Dedicated exhaust fans

  ; Indirect expenses (allocated by %)
  mortgage_interest: 14400.00
  property_tax: 7200.00
  homeowners_insurance: 2400.00
  utilities_gas_water: 2880.00
  repairs_maintenance: 1800.00
  total_indirect: 28680.00
  business_portion_indirect: 5974.00  ; $28680 × 20.83%

  ; Total home office deduction
  total_deduction: 7024.00  ; Direct + Indirect

  Expenses:Mining:HomeOffice:Direct        1050.00 USD
  Expenses:Mining:HomeOffice:Indirect      5974.00 USD
  Income:Personal:Home:MortgageInterest   -2999.00 USD  ; Reduce personal deduction
  Income:Personal:Home:PropertyTax        -1500.00 USD
  Assets:Personal:Home                    -2475.00 USD  ; Depreciation reduces basis

Important: Home office depreciation reduces home cost basis, creating taxable gain when you sell house.

Example:

Home purchased: $500,000
Home office depreciation (5 years): $12,375
Adjusted basis: $487,625
Home sold: $600,000
Capital gain: $112,375 (not $100,000)

Extra tax from home office: ~$2,970 (24% bracket × $12,375)

Is home office deduction worth it?

Annual benefit: $7,024 × 24% = $1,686/year tax savings
5 years: $8,430 total savings
Future tax on depreciation recapture: $2,970
Net benefit: $5,460

Yes, still worth it, but clients need to understand future impact.

Challenge #5: Bitcoin Sale Tracking (Cost Basis)

When client sells mined Bitcoin, need to track cost basis.

Cost basis = FMV when mined (already reported as income)

Example:

Mined Bitcoin (October 2025):

0.0435 BTC @ $68,667 average = $2,987 income recognized

Sell Bitcoin (December 2025):

0.0435 BTC @ $72,000 = $3,132 proceeds
Cost basis: $2,987 (from when mined)
Capital gain: $145

Beancount entry:

2025-12-15 * "Sell Mined Bitcoin" #bitcoin-sale
  btc_sold: 0.0435
  cost_basis: 2987.00  ; From October mining income
  sale_price_per_btc: 72000.00
  gross_proceeds: 3132.00
  exchange_fee: 31.32  ; 1% Coinbase fee
  net_proceeds: 3100.68
  capital_gain: 113.68  ; Net proceeds - cost basis
  holding_period: "short_term"  ; < 1 year from mining date
  Assets:Crypto:Bitcoin:Mined       -0.0435 BTC @ 68666.67 USD
  Assets:Checking                    3100.68 USD
  Expenses:Fees:Exchange               31.32 USD
  Income:CapitalGains:ShortTerm      -113.68 USD

Tax reporting:

Short-term capital gain (held < 1 year): Taxed as ordinary income
Form 8949, Part I (short-term)

If held > 1 year before selling:

Long-term capital gain: Taxed at 0%/15%/20%

Strategy: For tax efficiency, mine Bitcoin → hold 1+ year → sell (long-term treatment).

My Complete Monthly Closing Checklist

For mining business clients, I do monthly closes:

Day 1-5 of Following Month:

✓ Export mining pool statement (CSV)
✓ Calculate total BTC mined
✓ Calculate average BTC price for month
✓ Record monthly mining income entry
✓ Record pool fee expense

Day 6-10:

✓ Receive electricity bill
✓ Calculate mining vs. household allocation
✓ Record electricity expense

✓ Record internet expense
✓ Record any repairs/maintenance
✓ Record any equipment purchases

Day 11-15:

✓ Update fixed asset ledger (if new equipment)
✓ Calculate monthly depreciation
✓ Record depreciation entry

✓ Reconcile bank accounts (business checking)
✓ Reconcile crypto wallets (Bitcoin balance)

Day 16-20:

✓ Generate P&L for month
✓ Calculate year-to-date net profit/loss
✓ Compare to business plan projections
✓ Alert client if off-track

Day 21-25:

✓ Calculate quarterly estimated tax (if needed)
✓ Prepare Form 1040-ES voucher
✓ Send to client for payment by deadline

End of Month:

✓ Client review meeting (15 minutes)
✓ Discuss profitability trends
✓ Adjust operations if needed
✓ Document meeting notes (audit defense)

Beancount Queries I Run Monthly

Net Profit YTD:

SELECT
  sum(income) AS total_income,
  sum(expenses) AS total_expenses,
  sum(income) + sum(expenses) AS net_profit
WHERE account ~ 'Mining'
  AND year = 2025

Electricity Cost Per BTC Mined:

SELECT
  sum(electricity) / sum(btc_mined) AS cost_per_btc
WHERE account ~ 'Mining:Electricity'
  AND year = 2025

Equipment ROI:

SELECT
  sum(equipment_cost) AS total_investment,
  sum(net_profit) AS cumulative_profit,
  sum(net_profit) / sum(equipment_cost) AS roi_to_date
WHERE account ~ 'Mining'

Break-Even Analysis:

SELECT
  months_operating,
  cumulative_loss_to_date,
  current_monthly_profit,
  months_to_breakeven

Questions for Alice and Tina

Alice: Your client’s Year 2 still showing loss (before mid-year equipment upgrade). How are you documenting the “path to profitability” for audit defense? Business plan amendment?

Tina: For home office photos documenting exclusive use - are you storing these in client’s permanent tax file? How often do you update photos (annually, or only at initial setup)?

For everyone: How are you handling the Bitcoin price volatility for cost basis tracking? Using daily close price, or intraday price at exact moment of mining payout?

My Mining Client Service Package

I offer 3 tiers:

Tier 1: Hobby Miner ($150/month)

1-2 ASIC miners
Monthly income/expense tracking (aggregated)
Quarterly estimated tax calculation
Annual Schedule 1 reporting
Basic record-keeping

Tier 2: Small Business ($400/month)

3-10 miners
Monthly detailed tracking
Fixed asset ledger maintenance
Home office calculation
Monthly P&L statements
Quarterly tax planning
Schedule C preparation
Audit support documentation

Tier 3: Professional Operation ($850/month)

10+ miners or GPU farm
Weekly monitoring
Daily transaction tracking
Advanced depreciation planning (Section 179, bonus, MACRS)
LLC bookkeeping
Multi-state nexus analysis
Business plan maintenance
Full audit defense package

My typical client: Tier 2 (small business with 5-8 miners)

Tools I’m Using

Software stack:

Beancount: Core ledger
Fava: Web interface for Beancount
Mining pool APIs: Auto-import transactions (custom Python scripts)
CoinTracker: Secondary cost basis tracking
Google Sheets: Client dashboard (monthly P&L summary)
Dropbox: Document storage (receipts, photos, contracts)

Custom scripts:

Mining pool CSV → Beancount importer
Electricity allocation calculator
MACRS depreciation scheduler
Form 1040-ES payment voucher generator

The Client Education Problem

Biggest challenge: Clients don’t understand the complexity BEFORE they start mining.

What clients think:
“I’ll buy a miner, plug it in, Bitcoin comes out. Easy!”

What actually happens:

Miner arrives, need dedicated 240V circuit ($2,000 electrical work)
Miner is LOUD (90 dB, can’t run in house, need separate space)
Electric bill doubles ($200/month → $1,400/month)
Mining income = taxable immediately (need quarterly estimated tax payments)
Record-keeping is tedious (monthly tracking, depreciation, home office)
Profitability depends on Bitcoin price volatility

My solution:

Upfront consultation ($150, 1 hour)
“Mining Business Reality Check” document
Pro forma financial projections
Break-even analysis
Decision: GO or NO-GO

About 40% decide NOT to mine after seeing real numbers.

That’s a SUCCESS - saved them from unprofitable venture.

My Bottom Line

Mining bookkeeping is complex but manageable with:

Monthly closing checklist
Beancount for detailed tracking
Mining-specific chart of accounts
Automated imports where possible
Client education upfront

Alice’s client example is excellent - clear business classification, path to profitability, meticulous records. That’s the gold standard.

Bob Martinez
Small Business Bookkeeping

P.S. - I’ve created “Mining Business Beancount Template” and “Monthly Mining Closing Checklist.” If interest, happy to share. Also have Python scripts for mining pool imports (Foundry USA, F2Pool, AntPool).