Physical materials have provisions regarding natural resource mining that are organized around the life cycle of a mining operation. The mining cycle operates in four phases:
- Decommissioning and post-closure.
In the context of mining for physical minerals, the Code allows for immediate deduction of expenses through the exploration and development stages. Development involves activities after the existence of ores or minerals in commercially marketable quantities has been disclosed, and can include expenses incurred during the development and production stage.
Once in the production stage, inventories are required to be established.
In summary, the IRS does not immediately impose tax when gold is produced. The tax treatment of production follows the general rule of capitalization of costs associated with the production of gold and current deduction of period expenses.
The top five mining corporations are responsible for roughly 20% of annual projection. Therefore, a significant portion of U.S. gold production is subject to the corporate income tax.
Individuals engaged in gold mining are subject to provisions that limit their use of losses to reduce taxable income. The IRS stresses Sec. 183’s rules on hobby activities to individual placer mining. IRC section 183 states that a miner must be in a trade or business or engaged in an activity for the production of income with the objective of making a profit in order to claim mining related expenses such as those for exploration and development.
Thus, a smaller-scale operation is less likely to result in a profitable operation and more likely to fall within Sec. 183’s rules on hobby activities.
Source: Craig White, Ph.D. “Gold and bitcoin: Tax implications of physical and virtual mining.” The Tax Adviser, August 2020, pp. 516-521.