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The purpose of this article is to explore the options for deducting equipment used in cryptocurrency mining operations. In this article, I will specifically speak to the computer equipment used in mining operations. Other fixed assets such as buildings, office furniture, etc. which might be employed in a larger scale operation are beyond the scope of this article. Additionally, I will be treating the computer equipment as asset class 00.11 information systems defined in Table B-1 of IRS Publication 946. Currently, there are 3 different concepts that are important to understand when considering crypto mining equipment.
Section 179 Deduction
A taxpayer is allowed to elect to expense property placed in service during the tax year (up to $510,000). To qualify, the depreciable property must:
- Be tangible personal property;
- Be other tangible property (except buildings & structural components);
- Be single purpose agricultural or horticultural structures;
- Be storage facilities (except buildings & structural components);
- Be off-the-shelf computer software; or
- Be qualified real property.
In addition, the following requirements are placed on taking the deduction:
- The property must be acquired by purchase from a third party (gifts do not apply);
- If the amount of eligible property placed in service exceeds $2,030,000, the total deductible amount is phased out; and
- The amount deducted cannot exceed the amount of income earned in a trade or business (If your net income for all active trades and businesses is only $2,000, you are not able to deduct $150,000 of section 179 expense to offset passive income).
Any computer hardware or software used in a cryptocurrency mining operation would be able to be deducted under section 179 using form 4562. The deduction would then flow to either the business return (1065, 1120, etc.) or schedule C of form 1040.
Special Depreciation Allowance (Bonus Depreciation)
The special depreciation allowance (hereafter referred to as bonus depreciation) represents an opportunity to expense 50% of the cost of a fixed asset immediately. Property must meet the following requirements to be eligible for bonus depreciation:
- The property must be depreciated under MACRS;
- The property must have a useful life of at least 5 years;
- The original use of the property must begin with you after August 31, 2008;
- You must have acquired the property by purchase after August 31, 2008 with no binding written contract for the acquisition in effect before September 1, 2008; and
- The property must be placed in service for use in your trade or business after August 31, 2008.
There is also notable excepted property to electing bonus depreciation:
- Any rolling stock or other equipment used to transport reuse or recyclable materials;
- Property required to be depreciated using the Alternative Depreciation System (ADS);
- Other bonus depreciation property to which section 168(k) of the Internal Revenue Code applies;
- Property for which you elected not to claim any special depreciation allowance;
- Property placed in service and disposed of in the same tax year; and
- Property converted from business use to personal use in the same tax year acquired.
Assuming that the computer equipment in a cryptocurrency mining operation meets the above requirement, 50% of the cost may be deducted in the year acquired. The deduction would flow to either the business return (1065, 1120, etc.) or schedule C of form 1040.
MACRS Depreciation
MACRS is the depreciation methodology allowed for most tangible personal property. Depreciation percentages taken from the MACRS tables is multiplied by the non-expensed cost (the basis) of the asset to derive current year depreciation. The MACRS tables are available in Publication 946. Fixed assets classified as asset class 00.11 information systems (computer equipment) are subject to a 7 year useful life. The deduction would flow to either the business return (1065, 1120, etc.) or schedule C of form 1040.
Reference
Note that the below referenced material is for 2016 as 2017 has not yet been published.
https://www.irs.gov/pub/irs-pdf/p946.pdf
https://www.irs.gov/pub/irs-pdf/f4562.pdf
Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.