Crypto mining and staking are both taxed twice under current federal rules: first as ordinary income when you receive the rewards, then again as a capital gain or loss when you later sell, swap, or spend those tokens. The income side is priced at the coin’s fair market value in U.S. dollars the moment you gain control of it, and that same value becomes your cost basis for the eventual disposal. Whether you can deduct any of the costs of earning those rewards depends entirely on whether the IRS treats your activity as a business or a hobby.
Mining Rewards as Ordinary Income
Every token you mine is gross income under Internal Revenue Code Section 61, which sweeps in income from all sources.1Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined The taxable amount is the coin’s fair market value in dollars at the exact date and time it lands in your wallet, and that same figure becomes your cost basis for later.
You owe this tax even if you never convert the coin to cash. A miner who earns 0.05 BTC on a Tuesday afternoon owes tax on whatever that fraction was worth at that moment, no matter what the price does afterward. The income is taxed at your ordinary federal rate, which in 2026 runs from 10% to 37% depending on total taxable income.2Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
Staking Rewards and the Dominion-and-Control Rule
Revenue Ruling 2023-14 settled the IRS’s position on staking. The fair market value of validation rewards is included in gross income for the year you gain dominion and control over the tokens.3Internal Revenue Service. Rev Rul 2023-14 The rule applies whether you stake directly on-chain or through an exchange. Dominion and control means you can actually sell, transfer, or swap the reward. If a protocol locks rewards during a cooldown, the tax event is deferred until the tokens become accessible.
Each unlock is a separate income event priced at that moment’s value. A validator that pays out daily creates 365 individual income entries per year for a single position. The record-keeping burden alone catches people off guard, and it multiplies quickly when mining runs alongside staking.
Liquid Staking Adds a Wrinkle
When you deposit ETH or another token into a liquid staking protocol and receive a derivative token in return, the IRS treats exchanging one digital asset for another as a taxable disposal.4Internal Revenue Service. Digital Assets That swap can trigger a capital gain or loss based on the difference between your basis in the deposited token and the fair market value of the derivative you receive. No specific IRS guidance addresses liquid staking tokens by name, so the safest approach is to treat each conversion as a taxable event and track basis accordingly.
Business or Hobby Determines Whether You Can Deduct Anything
This classification is where combined mining and staking operations either save or lose thousands of dollars. The IRS looks at whether you pursue the activity with continuity, regularity, and a primary purpose of earning income or profit.5Internal Revenue Service. Instructions for Schedule C (Form 1040) Factors include time and effort invested, whether you keep businesslike records, your expertise, and your history of income or losses.
Business operators can deduct hardware, electricity, cooling, internet service, mining pool fees, and software subscriptions against income. The trade-off is self-employment tax: 15.3% of net earnings, split between 12.4% for Social Security and 2.9% for Medicare.6Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) For anyone generating meaningful mining income, the deductions typically more than offset the self-employment hit.
Hobby classification eliminates every one of those deductions. Under the One Big Beautiful Bill Act, miscellaneous itemized deductions are permanently gone. You still owe income tax on every dollar of rewards, with zero offset for the costs of earning them. Anyone running rigs or staking meaningful amounts should document a profit motive carefully, because the gap between business and hobby treatment is the gap between writing off a $400 monthly electricity bill and eating it entirely.
Hardware Write-Offs for Business Operators
Mining rigs, ASICs, GPUs, and cooling equipment qualify as business property eligible for accelerated write-offs. Section 179 lets you expense up to $2,560,000 of qualifying equipment in the year you place it in service. The One Big Beautiful Bill Act also permanently restored 100% bonus depreciation for qualified property acquired after January 19, 2025, so mining hardware bought in 2026 can be fully written off in year one. Hobby miners get none of this.
Home Office Space
If you dedicate a room or defined space in your home exclusively and regularly to the operation, you may qualify for the home office deduction.7Internal Revenue Service. Simplified Option for Home Office Deduction Exclusively is the key word. A spare bedroom that also hosts guests does not qualify. A closet packed with rigs does. The simplified method allows $5 per square foot up to 300 square feet; the regular method allocates actual rent, utilities, and insurance by the percentage of the home used.
Capital Gains When You Sell, Swap, or Spend
Disposing of mined or staked tokens creates a second taxable event. Your gain or loss is the sale price minus your cost basis, which is the fair market value you already reported as income at receipt. If Bitcoin was worth $60,000 when you mined it and $75,000 when you sold it, you have a $15,000 capital gain on top of the $60,000 already reported as ordinary income.
Holding period sets the rate. Tokens held one year or less are taxed at ordinary income rates. Hold longer than a year and you qualify for long-term capital gains rates of 0%, 15%, or 20% depending on taxable income.2Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates High earners also face an additional 3.8% Net Investment Income Tax when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly, pushing the effective top rate to 23.8%.8Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
If a token loses value after you receive it, selling at a loss offsets other capital gains dollar-for-dollar. Losses beyond your gains can reduce up to $3,000 of ordinary income per year ($1,500 if married filing separately), and the rest carries forward indefinitely.9Internal Revenue Service. Topic No 409 – Capital Gains and Losses
Which Units Count as Sold
When you sell part of a stack you accumulated over time, the IRS defaults to first-in, first-out (FIFO): the oldest tokens are treated as sold first. Specific identification is allowed if you maintain records showing each unit’s unique identifier, acquisition date, cost basis, and disposal details.10Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions That control over whether you sell high-basis or low-basis units first can meaningfully shift your bill. Without the documentation, you’re stuck with FIFO whether or not it produces the best result.
No Wash Sale Rule Yet
As of 2026, the federal wash sale rule under Section 1091 does not apply to digital assets. You can sell a token at a loss and immediately repurchase it to harvest the loss, without the 30-day waiting period that applies to stocks. The President’s Working Group on Digital Asset Markets has recommended extending the rule to crypto, so this window may not stay open.
Quarterly Estimated Payments
Mining and staking income has no withholding. If you expect to owe $1,000 or more in federal tax for the year after subtracting withholding and credits, the IRS expects quarterly estimated payments. Missing a deadline triggers an underpayment penalty accruing interest at 7% annually.11Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
The 2026 deadlines are April 15, June 15, September 15, and January 15, 2027.12Internal Revenue Service. 2026 Form 1040-ES Estimated Tax for Individuals You can skip the January payment if you file the 2026 return and pay in full by February 1, 2027. To avoid penalties entirely, pay at least 100% of your prior year’s total tax through estimated payments and withholding. If last year’s adjusted gross income exceeded $150,000, that safe harbor rises to 110%.13Internal Revenue Service. Publication 505 (2026) – Tax Withholding and Estimated Tax Crypto prices swing hard between quarters, and a strong Q1 can create obligations that feel premature but are still legally required.
How the Income Lands on Your Return
Business operators report income and deductible expenses on Schedule C. The net profit flows to Schedule SE for self-employment tax and to the main Form 1040 as adjusted gross income.5Internal Revenue Service. Instructions for Schedule C (Form 1040) Hobby miners and stakers report the full fair market value of rewards as “Other Income” on Schedule 1, with no deductions.4Internal Revenue Service. Digital Assets
Sales go on Form 8949, listing each transaction with acquisition date, sale date, proceeds, cost basis, and gain or loss.14Internal Revenue Service. Instructions for Form 8949 The totals feed Schedule D. Crypto tax software is close to essential once you have hundreds of reward events.
Every Form 1040 also asks whether you received, sold, exchanged, or otherwise disposed of any digital asset. If you mined or staked anything, the answer is yes, even if you never sold a coin.15Internal Revenue Service. Determine How to Answer the Digital Asset Question Answering no when you should answer yes is a false statement on a federal return.
Starting in 2026, exchanges and brokers must report sales of covered digital assets on Form 1099-DA, including cost basis for covered securities.16Internal Revenue Service. Instructions for Form 1099-DA (2026) For 2025, brokers reported gross proceeds only. Expanded 2026 reporting gives the IRS basis data to cross-reference against your return. Even where staking transactions are temporarily exempt from broker reporting, the underlying rewards remain fully taxable regardless of whether you receive a 1099.
Records to Keep
Combined mining and staking generates a lot of taxable events. For each reward, keep the date and time of receipt, the fair market value in dollars at that moment, and blockchain identifiers such as transaction hashes and wallet addresses. For each disposal, keep the date, amount received, and (if using specific identification) which units were sold.10Internal Revenue Service. Frequently Asked Questions on Virtual Currency Transactions Keep invoices for hardware, electricity bills, and pool fee receipts for any deductions claimed.
Separate mining records from staking records. The IRS generally requires you to keep tax records for three years from filing, but that stretches to six years if you underreport income by more than 25%, and seven years if you claim a loss on worthless assets.17Internal Revenue Service. How Long Should I Keep Records Given how volatile crypto values are, seven years is the practical minimum.
What Getting It Wrong Costs
The IRS applies a 20% accuracy-related penalty on any underpayment caused by negligence or a substantial understatement of income.18Internal Revenue Service. Accuracy-Related Penalty If the IRS finds that unreported crypto income was intentionally concealed, the civil fraud penalty rises to 75% of the underpayment attributable to fraud.19Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty These stack on top of the tax owed plus interest. With exchanges now reporting transaction data directly to the IRS through Form 1099-DA, the odds of unreported income going unnoticed have dropped substantially.