Is mining considered a business or hobby?

You’ll need to determine if your mining constitutes a business or hobby under IRS guidelines. To qualify as a business the activity must be done on a continuing, consistent basis, with the purpose of profit generation. If your mining activity is sporadic or insubstantial then it is likely considered to be a hobby.

If the IRS considers your mining activity to be a business then you can reduce your tax liability with deductions and credits. If the IRS sees your mining activity as a hobby you still may be able to deduct some expenses, but only if they exceed 2% of your gross income. If your mining is a hobby then any deductions are reported on Schedule A as itemized deductions. This may not necessarily be a bad thing because you are not required to pay the 15% self-employment tax if operating as a hobby as opposed to a business.

The negative here is that itemized deductions are limited to expenses that exceed 2% of your adjusted gross income, itemized deductions don’t allow for certain home office and start-up costs, and you are not allowed to deduct losses from your mining activity. It is generally easier to qualify for deductions as a business, however, the self employment tax may reduce the benefit.

The IRS looks at numerous factors to decide if your mining is a business, including: 1) Do you put in the necessary time and effort to turn a profit?; (2) Have you made a profit in this activity in the past, or can you expect to make one in the future?; (3) Do you have the knowledge to succeed in this field?; (4) Do you depend on income from this activity?; and (5) Are your losses beyond your control?