Bitcoin and the other proof-of-work chains issue new tokens to miners who solve a hash puzzle. Ethereum and the proof-of-stake chains issue new tokens to validators who lock up an existing stake. Both activities produce taxable income at the moment the tokens are received. The IRS treatment past that point differs in three material ways.
This article walks through the differences, explains why mining ends up classified as self-employment income in most cases while staking generally does not, and works the maths on what that costs.
The starting point: both are income at receipt
For both mining and staking, Notice 2014-21 and Revenue Ruling 2023-14 set the same framework: rewards are gross income at fair market value on the date of receipt. The cost basis of the received tokens is the income recognised at that point; the eventual sale produces a separate capital gain or loss.
The divergence starts with the question of what kind of income it is. Mining typically produces income from a "trade or business"; staking typically produces investment income. The classification flows from the level of activity, organisation and intent.
Why mining is usually trade or business income
The IRS’s position, set out informally in chief counsel advice and reflected in the Publication 535 framework for trade or business expenses, is that crypto mining at any meaningful scale meets the standard for a trade or business. The reasoning:
- Mining requires acquired equipment (ASICs, GPUs) operated continuously.
- It requires ongoing operating decisions: which pool to join, when to upgrade hardware, where to source electricity.
- The activity is conducted with the primary purpose of profit.
- It involves regular, frequent activity over time.
Once an activity is classified as a trade or business, the rewards are reported on Schedule C (self-employment) rather than Schedule 1 (other income). Self-employment income is subject to:
- Ordinary income tax at the taxpayer’s marginal rate.
- Self-employment tax of 15.3 percent on the first $168,600 (2024 cap; the 2026 cap will be inflation-adjusted) for Social Security plus 2.9 percent uncapped for Medicare.
- An additional 0.9 percent Medicare tax on amounts above $200,000 single or $250,000 joint.
The benefit is that ordinary and necessary business expenses are deductible: the cost of the mining equipment (depreciable under section 168), electricity attributable to the mining operation, internet, hosting fees, and a home-office allocation if applicable. For a profitable miner the deductible expenses substantially offset the gross income.
Why staking is usually investment income
Staking, by contrast, requires very little ongoing activity from the staker. The validator software runs autonomously; the staker’s only continuous role is to keep the node online. For a delegated staker (a customer of an exchange staking-as-a-service product) even that role is delegated to the exchange.
The IRS has not issued formal guidance specifically on the trade-or-business classification of staking, but the prevailing practitioner view is that ordinary individual staking does not rise to the level of a trade or business. The activity is more analogous to receiving interest on a bond than to operating a mining business. The income is therefore reported on Schedule 1 as other income, not Schedule C.
The consequence: staking rewards are subject only to ordinary income tax at the marginal rate, with no self-employment tax. For a staker in the 24 percent federal bracket, that is a 15.3 percentage point lower effective tax rate compared to the same dollar amount classified as mining income (before considering deductions).
The hard cases: hosted mining and large-scale staking
The bright-line distinction breaks down in two cases:
Hosted mining. A retail investor who buys a mining contract from a hosted-mining provider is, in effect, in a passive investment position: the provider operates the equipment and the investor receives a share of the rewards. Whether this still counts as a trade or business is a fact-specific question. The conservative position is to report the income on Schedule C and deduct the hosting fees as a business expense; the aggressive position is to treat it as passive investment income on Schedule 1.
Large-scale staking with active management. A staker running a dozen validators across multiple chains, actively rebalancing, may have crossed into trade-or-business territory even though no individual node requires active operation. The factors are similar to those for mining: scale, organisation, business-like management.
For the typical retail user with a single ETH or SOL staking position on Coinbase, neither of these edge cases applies. Schedule 1 reporting, no self-employment tax, is the right answer.
What to actually deduct if you are mining
If your mining activity is properly classified as a trade or business, the deductible expenses include:
- Equipment depreciation. Mining hardware is depreciated under MACRS. Most ASICs are five-year property under Publication 946, eligible for 100 percent bonus depreciation through 2026 (phasing down thereafter unless extended by Congress).
- Electricity. The portion of the electricity bill attributable to the mining operation, supported by sub-meter readings or a documented allocation.
- Internet and hosting. Fully deductible if the connection is dedicated to mining; allocated if shared.
- Repairs and maintenance. Replacement fans, thermal paste, replacement PSUs.
- Home office. If a portion of the home is used regularly and exclusively for the mining business, the home-office deduction applies under section 280A.
The single biggest filing error we see for retail miners is failing to depreciate the equipment. The hardware is often the largest cost in the operation and depreciating it across five years (or expensing it in year one under bonus depreciation) materially reduces the tax bill.
How to set up the records
For staking, the recordkeeping is the same as for any other crypto income: date, quantity, USD fair market value at receipt. Our Crypto Tax Calculator handles this automatically when staking rewards appear in the source CSV.
For mining, the additional records are: equipment purchase invoices (for depreciation), monthly electricity bills with the mining sub-meter reading, and a spreadsheet allocating the home-office percentage. None of this is exotic, but it does need to be kept contemporaneously. Reconstructing five years of electricity bills the day before an audit is much harder than keeping them in a folder as they arrive.