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  • Earlier, we covered how Bitcoins were taxed on the investor side (“How are Bitcoins Taxed?“), but due to the special nature of mining Bitcoins, we wanted to write another article dedicated specifically to taxes on mining Bitcoin. However, the taxes on mining and investing/trading actually go hand-in-hand, so it is very important to understand taxes on both situations.

    How are Mined Bitcoins Taxed?

    Whenever Bitcoins or other cryptocurrencies are mined, the value of those coins are considered ordinary income, or regular income that a business would normally receive in fiat from your customers. Just like if you received a car from a client in exchange for services, you still need to pay tax on the service that you provided. The value of the coin is determined when you receive possession of it, or when it hits your wallet. If you are receiving multiple transactions in a day, you need to be determining the value of the coin when it hits since the price of crypto can fluctuate greatly throughout the day.

    Determining the Fair Market Value

    Most wallets or exchanges timestamp the transactions down to the seconds, so it is very easy to determine the fair market value of the coin at the time it was received. When it is received, you need to determine the market value of that coin. Now, it is impossible to know when coins hit your wallets throughout the day, especially if you are running a large mining operation. The best practice here is to reconcile your transactions so that it is not cumbersome, such as daily, weekly or even monthly, depending on the frequency of your transactions. Reconcile your transactions in a manner that is consistent every single time. Use the same method of determining the price each time because if you do not use the same pricing method each time, in case of an audit, the prices you use will likely be called into question.