Earning cryptocurrency through mining (Proof-of-Work) or staking (Proof-of-Stake) feels like free money, but the IRS views these activities as generating immediate, taxable income.

Unlike simply buying and holding crypto, these activities create complex reporting challenges and often result in two distinct taxable events.

This guide breaks down the tax rules for rewards earned from both staking and mining and explains how to manage the intense tracking burden.

The First Tax Event (Ordinary Income)

The moment you receive crypto from mining a block or being rewarded for staking your tokens, you have a taxable event. The IRS treats the fair market value (FMV) of that cryptocurrency as Ordinary Income.

1. When is the Income Realized?

You owe tax on the value of the coins at the time you gain "dominion and control" over them—meaning you can freely sell, trade, or move the funds.

  • Tax Rate: This income is taxed at your regular, progressive federal income tax rate (e.g., 10% to 37%), just like a salary or business profit.
  • Cost Basis Set: The FMV you report as income immediately becomes your cost basis for that coin. This is the starting point used to calculate your gain or loss when you eventually sell it.

2. Mining vs. Staking (Deductions Matter)

The distinction between a casual hobby and a business determines your ability to write off expenses:

  • Mining Income: The IRS typically views substantial mining operations as a trade or business. This allows you to report income on Schedule C and deduct business expenses like electricity, hardware depreciation, hosting fees, and even office space, significantly reducing your taxable income.
  • Staking Income: Staking is generally treated as investment income and reported as Other Income on Schedule 1. While you can deduct some minor investment-related fees, you usually cannot deduct operating expenses like electricity or depreciation unless you qualify as a full-time trader.

The Second Tax Event (Capital Gains)

After you receive the mined or staked coins, they are held as property. If you later sell, trade, or spend those coins, you trigger a second taxable event: Capital Gains or Losses.

This event is separate from the initial income tax you paid.

  • The Calculation: You subtract your Cost Basis (the FMV when you received the coin) from the proceeds (the price when you sold it).
    • Example: You receive 1 ETH from staking when it is worth $3,000. You pay ordinary income tax on $3,000. If you sell it six months later for $4,000, your capital gain is $1,000.
  • Holding Period:
    • Short-Term Gain (1 year or less): Taxed at your higher Ordinary Income rate.
    • Long-Term Gain (more than 1 year): Taxed at the lower, Preferential Capital Gains rates (0%, 15%, or 20%).

The best strategy is to hold your earned coins for at least one year and a day to convert potential gains into the lower long-term capital gains category.

The Compliance Challenge and Essential Tools

The biggest hurdle for stakers and miners is tracking. Because rewards are often received hundreds or thousands of times per year, manually logging the exact time, dollar value, and cost basis of every micro-transaction is nearly impossible.

This level of detail is necessary to calculate your total ordinary income (Part 1) and your cost basis for every subsequent sale (Part 2).

Automating Tax Reporting (Promoting Koinly & CoinTracker)

To accurately comply with IRS rules, specialized cryptocurrency tax software is necessary. These platforms connect to your exchanges and wallets via API or address, automatically tracking every transaction, calculating the FMV at the time of receipt, and assigning the correct cost basis.

  • Data Aggregation: Services like Koinly and CoinTracker are built to automate the tracking of staking and mining rewards. They consolidate thousands of rewards transactions and calculate your ordinary income total.
  • Form Generation: They generate the required IRS forms, primarily Form 8949 and Schedule D, which summarize your capital gains and losses.

Final Filing Step (Promoting TurboTax)

Once the complex transaction data is compiled, using tax software simplifies the final filing. Both Koinly and CoinTracker offer reports that integrate directly with major tax filing platforms.

After generating your comprehensive crypto report, software like TurboTax allows you to seamlessly import the final totals for your Schedule D and Schedule 1, ensuring all your complex crypto activity is reported accurately without manual entry.