Do I Need to Pay Crypto Self-Employment Taxes?

If you’re a US taxpayer and self-employed, you must pay self-employment taxes, an additional 15.3% tax including Medicare and Social Security taxes. Most salaried workers have half of this automatically deducted from their paychecks, with the other half paid by their employer.

However, if you're self-employed and don't have these deductions and payments made for you, the IRS still wants you to report and pay these taxes in a timely manner.

If your crypto activities constitute “self-employment,” you’ll need to report and pay quarterly estimated taxes, including the 15.3% self-employment tax on top of ordinary income taxes.

According to the IRS, you’ll need to pay the 15.3% tax if your net earnings from self-employment are more than $400 in a tax year. But what constitutes “self-employment” versus a hobby?

If your crypto activities generate income and represent a sizable portion of your total yearly earnings, and you run your operations in a businesslike manner, they may be subject to self-employment taxes. Common situations this could apply to include:

• Bitcoin and crypto mining

• Creating and selling NFTs as a business

• Getting paid in crypto for goods or services (not a salary)

• Running a validator node

We recommend reading the IRS’ guidance and contacting a crypto tax accountant to determine whether your crypto activities constitute self-employment.

Note that you do not pay self-employment taxes on crypto capital gains, as these are not considered "earned" income.

Every taxpayer must pay taxes on their income throughout the year. W-2 employees have their federal income tax withheld from each paycheck. Self-employed or contract workers, however, need to make these payments quarterly as estimated tax payments.

Estimated taxes are required for various types of income, not just wages but also self-employment tax for Social Security and Medicare. W-2 employees might also need to make estimated payments if they gain substantial income during the year, like from selling a business or other unexpected gains. Not paying estimated tax on such income could lead to penalties.

The safe harbor rule protects taxpayers from penalties due to unforeseen or unpredictable income. To avoid penalties, one must meet one of the following conditions: owe less than $1,000 in taxes after withholdings and credits, pay at least 90% of the tax owed for the current year, or pay 100% (or 110% for high earners) of the previous year's tax through estimated payments.

States have their own versions of this rule. For instance, Maryland allows penalty avoidance if you owe less than $500 after withholdings and credits, or if your estimated payments are at least 110% of the previous year’s taxes.

The IRS wants taxes on income as soon as it’s earned. Because the self-employed don’t have federal taxes withheld from each paycheck, they must report and pay quarterly estimated taxes instead. Failing to do so can result in penalties and interest.

Part of this worksheet is reporting your expected yearly gross income. This can be tricky for the self-employed, especially in the volatile crypto market. Remember the safe harbor rules when calculating your crypto mining self-employment taxes and that overpayments will be refunded. If you’re struggling with your estimated quarterly payments, a crypto tax accountant can help.

The IRS Form 1040ES is a tax form that helps you calculate your owes each quarter. Once you’ve completed it, you can mail in your form and payment or pay your taxes online.

Few people enjoy paying their self-employment taxes quarterly, but there are some benefits to your crypto income being considered self-employment income. Chiefly, you will be able to take deductions for your business expenses.

This is particularly important for crypto miners, who may be able to get substantial tax deductions for their electricity and equipment expenses.

Here are answers to frequently asked questions about crypto self-employment taxes.

What qualifies crypto activities as self-employment?

Crypto activities like mining, selling NFTs, or getting paid in crypto for services must generate substantial income and be managed like a business to qualify as self-employment. Casual trading or hobby-level activities typically do not qualify.

How can I calculate my quarterly self-employment tax payments?

To calculate quarterly payments, use IRS Form 1040ES, which helps estimate the amount based on expected annual income. When making these estimates, it's crucial to factor in income volatility in the crypto market, and consulting a tax professional can provide further guidance.

What deductions can I claim from crypto self-employment income?

Crypto self-employment allows for deductions of business expenses, which is crucial for those in intensive operations like mining. Deductible expenses can include equipment and electricity costs, which may significantly reduce your taxable income.