Where is self-mined cryptocurrency sourced for state tax purposes when the machines sit in one state and the owner in another?
Edvin Givargis Published 17 minute read
The short answer
No state has published a sourcing rule for block rewards and transaction fees earned by a miner for its own account, so the answer is whatever each state's general receipts rule produces for a receipt with no purchaser. Two readings compete. The cost of performance reading assigns the reward to the state where the income-producing activity is performed, which for a miner is where the machines run, because the costs of that activity (power, hosting, hardware) are incurred there; it is all or nothing in a greater-proportion state and splits in a pro rata state. The market reading, on the statutes' text, assigns little or nothing to the machines' state, because those rules look to where the customer received the benefit, and a protocol is not a customer with a location. Washington's cascade in RCW 82.04.462(3)(b), California's Cal. Rev. & Tax. Code section 25136(a)(1), and Tennessee's Tenn. Code Ann. section 67-4-2012(i) each show the problem in a different form, and the Washington Department of Revenue's 2019 interim statement answers classification and measure without touching sourcing. A miner should expect the machines' state to assert that the reward is earned where the machines run, whatever its sourcing regime says, should know what the text supports in reply, and should document its position in each state before the first return is filed.
What the receipt is, and why the federal label does not settle the state question
Federal law characterizes the reward but does not locate it. Under IRS Notice 2014-21, Q&A-1, virtual currency is treated as property, and under Q&A-8 a taxpayer who successfully mines virtual currency includes in gross income the fair market value of the currency as of the date of receipt, and under Q&A-9 an individual's net earnings from a mining trade or business, not undertaken as an employee, are self-employment income. Rev. Rul. 2023-14 applies the same timing to a cash-method taxpayer's staking rewards, measured when the taxpayer obtains dominion and control. Two features carry into every state analysis. Income is recognized on receipt, so there is a receipt to source the day the reward lands even if the coin is never sold. And nothing is purchased or sold at that moment: the miner performs computational work for a network, and the protocol, or a pool operator standing between them, delivers property in return.
States that measure by receipts pick up the same event. California defines gross receipts as the gross amount realized, "the sum of money and the fair market value of other property or services received," on "the sale or exchange of property, the performance of services, or the use of property or capital" (Cal. Rev. & Tax. Code section 25120(f)(2)). A block reward fits as property received for the performance of services, which routes it into the services sourcing rule and its missing-customer problem. Washington's interim statement reaches the analogous conclusion for its gross receipts tax: block rewards and transaction fees are service and other activities income "because they fall into no other specific B&O tax classification," measured by the value of the bitcoin when the miner obtains it. The library's article on the Washington B&O treatment of mining and staking operations covers classification, measure, and the second-sale question; this article takes up only where the receipt goes.
Two readings of the same receipt
The intuitive answer, that the reward is earned where the machines, the electricity, and the computation are, is the one a revenue agency in the machines' state is likeliest to assert and the working position many operators adopt. It is not a sourcing rule of its own. It is the result the cost of performance reading produces, and in a market state no sourcing statute supports it; the closest text is California's 2026 presumption for services that predominantly relate to tangible personal property, discussed below.
The cost of performance reading assigns a receipt to the state where the income-producing activity is performed. Virginia still assigns a receipt other than a sale of tangible personal property to the Commonwealth if the income-producing activity is performed there, or if it is performed both in and outside the Commonwealth and a greater proportion of it is performed in Virginia than in any other state, based on costs of performance (Va. Code section 58.1-416(A)). A mining cost pool is dominated by power, hosting, and hardware, all of which sit with the machines, so the machines' state usually wins the greater-proportion test. The machines' state loses the receipt only when the owner's costs elsewhere (engineering, treasury, pool management) shift the greater proportion; in a state that splits costs pro rata, the receipt follows the cost ratio instead.
The market reading takes the statutes at their word. A market rule attributes a receipt to where the customer received the benefit of the service, where the service was delivered, or where the intangible was used. A solo miner has no customer. A pooled miner has a counterparty, the pool operator, which receives and distributes the reward but is not located where the hashing occurs and is often outside the United States. The cascades were built around a customer's location, not a server's. Read this way, the market rule assigns a small fraction of the rewards to the machines' state, or none.
Washington: the interim statement is silent, and the cascade does not know what to do
Washington's business and occupation tax apportions the income of a person that earns apportionable income and is "taxable in another state" (RCW 82.04.460(1)). An out-of-state owner whose only Washington presence is hosted machines has Washington nexus through that physical presence (RCW 82.04.067(1)(c)(ii) and (3)(a)), and it is taxable in another state if it is subject to a business activities tax elsewhere or another state has jurisdiction to impose one under the substantial nexus standards of RCW 82.04.067(1) (RCW 82.04.460(4)(b)(i)). Because a business entity has substantial nexus with its state of organization or commercial domicile (RCW 82.04.067(1)(b)), an owner organized or domiciled outside Washington meets that condition whether or not its home state imposes a tax. The owner that cannot apportion is one organized and domiciled in Washington with no receipts or presence elsewhere; for it, all of the rewards are Washington gross income and the sourcing debate never begins.
For an owner that does apportion, RCW 82.04.462(1) multiplies apportionable income by a receipts factor, and RCW 82.04.462(3)(b) attributes each receipt to Washington through a cascade: where the customer received the benefit of the service; if the benefit was received in more than one state, where it was primarily received; then where the customer ordered the service; where the invoice was sent; where payment originated; the customer's address in the taxpayer's records; and finally the taxpayer's commercial domicile. The Department's interim statement of August 20, 2019 does not discuss apportionment, sourcing, attribution, or nexus; its resource list cites the apportionment rules, including WAC 458-20-19402, the rule implementing that cascade, without applying them.
The cascade runs on the word "customer," defined in WAC 458-20-19402 as a person or entity to whom the taxpayer makes a sale, grants the right to use intangible property, or renders services, "or from whom the taxpayer otherwise directly or indirectly receives gross income of the business." That captures a pool operator, an entity that pays the miner, and not a protocol, which is neither a person nor an entity. The two fact patterns diverge.
For a pooled miner, the customer is the pool operator, and the question is where the operator received the benefit of the miner's hashing service. The rule says a customer's related business activities "will generally occur either in the customer's market or at the customer's business location(s)" (WAC 458-20-19402 section 303(c)) and does not address purchased computation. One reading of that sentence places a pool's related business activities where it runs its servers and settles payouts, which is often outside Washington, and attributes the receipt there. A miner is taxable in the pool's state, including a foreign country, if it is subject to a business activities tax there or meets Washington's own substantial nexus standards for that state (RCW 82.04.460(4)(b)(i); RCW 82.04.462(5)(b)), and those standards are met by more than $100,000 of receipts from the state (RCW 82.04.067(1)(c)(i)). A miner whose pool payouts exceed that amount is taxable where they are attributed, so the receipts stay in the denominator and Washington's numerator is zero. Only a smaller miner with no physical presence in the pool's state reaches the throw-out rule in RCW 82.04.462(3)(c), which excludes the receipt from the denominator because part of the activity was performed in Washington; if those payouts are its only receipts, the factor is zero divided by zero, which WAC 458-20-19402 section 402(c) deems to be zero. On either path the market rule produces no Washington tax for a miner running every rig it owns in Washington. The Department is unlikely to accept that result, and the competing reading of section 303(c) will be made there: that the pool's related business activity includes the hashing it buys, so the benefit is received where the hash is computed. Neither reading is stated in the statute or the rule, and the 2024 amendment removed the former rule in section 303(b) for services related to tangible personal property and left the slot reserved.
For a solo miner, steps (i) through (vi) of the cascade each require a customer with a location. The block subsidy has no payer, and the transaction fees are paid by users the miner cannot identify or locate. The only step that does not depend on the customer is (vii), the taxpayer's commercial domicile. The reading that follows the text attributes solo block rewards to the owner's domicile state, where the owner is taxable under RCW 82.04.460(4)(b)(i) because a commercial domicile satisfies RCW 82.04.067(1)(b), so no throw-out applies: the receipts stay in the denominator and out of the numerator, and Washington's factor on them is zero. The competing reading is that a cascade written for receipts with customers should not be applied to receipts without one, and that the rewards belong where the income-producing activity took place, by analogy to RCW 82.04.460(1)'s reference to income "derived from business activities performed within this state." That reading has the statutory purpose on its side and no operative sentence; the Department has published nothing either way.
California and Tennessee: market rules with no customer to find
California sources sales from services to the state "to the extent the purchaser of the service received the benefit of the services in this state" and sales from intangible property to the extent the property is used in the state (Cal. Rev. & Tax. Code section 25136(a)(1) and (a)(2)). The Franchise Tax Board's regulation defines the place where the benefit is received as where the taxpayer's customer "has either directly or indirectly received value from delivery of that service" (Cal. Code Regs. tit. 18, section 25136-2). For taxable years beginning before 2026, the cascade for business customers runs from the contract and books and records, to reasonable approximation, to the location from which the customer placed the order, to the billing address. For taxable years beginning on or after January 1, 2026 (Cal. Code Regs. tit. 18, section 25136-2(j)(3)), the amended regulation starts with presumptions (section 25136-2(c)(1)(A)1.), including one that places the benefit in California to the extent the service predominantly relates to tangible personal property "located in this state when the service is received" (section 25136-2(c)(1)(A)1.b.), and then runs from the contract and books and records (section 25136-2(c)(1)(B)), to all other sources of information (section 25136-2(c)(1)(C)), to reasonable approximation (section 25136-2(c)(1)(D)), to the billing address (section 25136-2(c)(1)(E)); the order-placement step of the earlier cascade does not appear in the amended text. The amendment was filed August 27, 2025 and became operative October 1, 2025. Neither version contains a rule for a receipt with no identifiable customer, and the Final Statement of Reasons does not mention digital assets, mining, or block rewards.
Applied to mining, neither of the rule's two entry points fits. If the reward is a receipt from services, the purchaser is missing: a solo miner has none, and a pool operator received hashing but did not receive value from a validated block at any location the regulation contemplates. For a pooled miner, the tangible personal property presumption is the one regulatory sentence in these market regimes that a machines' state can point to, because the hashing is performed by rigs and the presumption does not say whose property it means. The presumption should not be read that far: every service provider uses its own equipment, so a presumption that reached the provider's own machines would swallow the cascade, and every example of the presumption in the regulation involves the customer's own property, such as a customer's goods picked up and delivered or a customer's components assembled and returned to it (section 25136-2(c)(1)(G), examples 3 and 9). The regulation allows either the taxpayer or the Franchise Tax Board to overcome a presumption by a preponderance of the evidence, considering the taxpayer's contracts and books and records first (section 25136-2(c)(1)(A)2.), and in example 9 the provider does so with records showing where the customer will employ the property. A miner reporting otherwise should be prepared to rebut the presumption on that footing, with contracts and records showing that no customer employs the rigs anywhere. If the reward is a receipt from intangible property, the use test has nothing to apply to, because the miner neither sold nor licensed intangible property to anyone; the coin it received is its own asset. Reasonable approximation is defined by reference to the market for the benefit of the service, consistent with the customer's activities, which again presupposes a customer. For an owner domiciled in California with machines elsewhere, the candidate approximations are the owner's location, the machines' state, or nowhere. California's statute does not exclude unassignable receipts from the denominator, so an owner that reports the reward and assigns none of it to the numerator has taken the zero-to-California position by default, and the Board's response, if it disagrees, is to reassign it or to invoke alternative apportionment under section 25137, the provision the library's article on petitioning for alternative apportionment describes.
Tennessee's rule produces a different default. Receipts other than sales of tangible personal property are in Tennessee if and to the extent the taxpayer's market for the sale is in the state, and for a service that means "if and to the extent the service is delivered to a location in this state," with rented, leased, or licensed intangibles assigned to where they are used and most other receipts from sales of intangibles excluded from the numerator and denominator outright (Tenn. Code Ann. section 67-4-2012(i)). A service whose state of assignment cannot be determined is reasonably approximated, and one that cannot be determined or approximated is excluded from both the numerator and the denominator. Those exclusions are the closest thing in any of these statutes to an express answer for a solo miner's reward, and the Department's rule conditions the second on a good-faith effort: a sale is excluded only if the taxpayer cannot assign it, including by reasonable approximation, using a reasonable amount of effort undertaken in good faith (Tenn. Comp. R. & Regs. 1320-06-01-.42(1)(f)). The intangible property exclusion reaches receipts from a sale of intangible property, and a miner sells nothing when it earns a reward, so that route depends on a characterization the text does not support. A pooled miner is in a different position. The pool operator is a business customer, and for a service delivered by electronic transmission the rule falls back, in order, to where the customer principally manages the contract, the customer's place of order, and the customer's billing address (Tenn. Comp. R. & Regs. 1320-06-01-.42(4)(c)2(ii)(II)III), with a billing-address safe harbor for a taxpayer with more than 250 customers and no customer above five percent of its service sales (Rule 1320-06-01-.42(4)(c)2(ii)(II)IV). Pool payouts are therefore assigned to the operator's location rather than excluded, and because Tennessee has no throw-out rule, payouts assigned outside Tennessee stay in the denominator and lower the Tennessee percentage. Because Tennessee apportions by receipts alone for tax years ending on or after December 31, 2025, after a phase-in beginning with tax years ending on or after December 31, 2023 (Tennessee Department of Revenue Notice #23-11, May 2023, implementing Public Chapter 377 (2023)), a solo miner whose rewards are its principal receipts and are excluded from the factor apportions by whatever is left, which for a pure mining entity may be a handful of incidental receipts or nothing. If every receipt is excluded, the factor is zero over zero, and the statute as read supplies no rule for a zero denominator, the undefined position the library's article on a company with no gross receipts describes for California. Tenn. Code Ann. section 67-4-2014(a) permits the taxpayer to petition for, or the Department to require, another method when the standard provisions do not fairly represent the taxpayer's business activity in Tennessee. That computation should be modeled before filing; a factor built on residual receipts can be higher than one that included the rewards and assigned them to the owner's state.
Practice notes
The first step in every state is to establish whether the owner apportions at all: in Washington, an owner organized or domiciled outside the state does, and one organized and domiciled in Washington with nothing elsewhere does not. The second is to separate solo from pooled mining, because a pool operator is a customer under Washington's definition and a business customer under Tennessee's rule, and a protocol is neither. The third is to write down the reading adopted in each state, with the text it rests on and the throw-out or exclusion consequence it produces, before the first return is filed; a position that assigns rewards to the owner's domicile in one state and to the machines in another needs a stated reason. Where a hosting affiliate stands between the owner and the machines, its hosting fee has an identified customer, and its position should be developed with the owner's; a group that reports the fee where the machines are and the rewards where the owner is will be asked why one building produces two answers. Where the amount at stake justifies it, a ruling request in the machines' state is the only way to convert one of the two readings into an answer that binds. G&G State Tax Group provides multistate receipts sourcing analysis and ruling request preparation for digital asset mining and hosting structures alongside its state and local tax practice.
This article states the law as of October 5, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group, or another state and local tax adviser, to confirm what has changed since this was written and how the rules apply to a specific situation.
This publication is informational in nature and is not, and should not be considered, legal, accounting, tax, or other professional advice for any person or situation. Correct application of tax law depends heavily on the facts and circumstances in each case, and G&G State Tax Group, LLC assumes no liability in connection with the use of this information, and is not obligated to inform any reader of changes in the law or other factors that could affect the information contained herein.