The Tax Reality of Passive Loss Limitations in Bitcoin Mining

As digital assets gain increasing acceptance as an asset class in the mainstream financial world, there is more attention and investment capital than ever flowing into the bitcoin mining industry. The uniqueness and capital-intensive nature of this industry necessitate an awareness of certain tax limitations related to passive activities.

Bonus Depreciation and the Impact of the One Big Beautiful Bill Act

Almost all of the capital investment in bitcoin mining projects goes into ASICs, containers and generators, all of which have been eligible for bonus depreciation since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. The TCJA’s bonus depreciation percentage had whittled down from 100% to 60% by tax year 2024, but the One Big Beautiful Bill Act has since restored permanent, 100% bonus depreciation for all qualifying assets placed in service after January 19, 2025.

With bonus depreciation offering the near certainty that mining projects will generate large taxable losses in the initial year, some miners have had the idea of using losses allocated to them through a passthrough structure to offset their taxable income from employment or other sources. What these people too often overlook are the passive loss limitation rules imposed by IRC Section 469.

How Passive Activity Loss Limitations Work Under Section 469

Under this limitation regime, net losses from a passive activity are only deductible against income from that same passive activity. This means that passive losses from a bitcoin mining investment would be currently deductible against income from a different bitcoin mining investment but not against ordinary income from employment, portfolio income or even income from investments in other unrelated business activities. Passive losses that cannot be currently deducted against passive income must be suspended and taken against passive income in future years or upon the eventual sale or disposition of the project.

Common Misconceptions Borrowed From Real Estate Investing

Miners who are excited by this idea may have heard examples from people in real estate where there are certain exceptions from the passive loss limitations, such as real estate professional status (REPS), short-term rentals and the $25,000 “mom and pop” exception. Unfortunately, no similar provisions exist for bitcoin miners who must follow the general guidelines for material participation that apply to any other industry.

The Test for Material Participation

To qualify as a material participant in a particular activity and avoid being subject to the passive loss limitation rules, a taxpayer must meet at least one of the following criteria:

1. The individual participates in the activity for more than 500 hours during such year.
2. The individual’s participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year.
3. The individual participates in the activity for more than 100 hours during the taxable year, and such individual’s participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year.
4. The activity is a “significant participation activity” for the taxable year, and the individual’s aggregate participation in all significant participation activities during such year exceeds 500 hours.
5. The individual materially participated in the activity (based on a different criteria) for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year.
6. The activity is a personal service activity, and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year.
7. Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous and substantial basis during such year.

If the bitcoin mining operation is structured as a limited partnership and the individual in question is a limited partner in said partnership, further restrictions apply. A limited partner is treated as materially participating if he or she can meet the first, fifth or sixth of the above criteria.

Planning Considerations for Active Bitcoin Mining Participants

The passive loss limitations of Section 469 are something that bitcoin miners and prospective investors in mining projects need to be aware of, but it’s not all bad news. An individual who intends to be actively involved in a bitcoin mining endeavor may have no trouble meeting one or more of the material participation criteria, and in such cases, there are indeed tax planning opportunities available. For bitcoin mining projects, Weaver brings a multidisciplinary approach. Our blockchain & digital assets team provides tax planning and compliance support, and our fixed asset advisory team helps with cost segregation for planned data centers and assessing bonus depreciation eligibility. Contact us to learn more.

Authored by David Hensley

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