Who this is for
- Individuals and couples who own GPU servers that a host or marketplace rents out by the hour or day
- Single-member LLCs and LLCs taxed as partnerships that own rented GPU servers
- Owners with wages who want to know whether the depreciation reduces tax on that pay
Not covered here
- How much depreciation is allowed and when (see the GPU server write-off guide)
- C corporations and S corporations that own the servers
- Evaluating GPU investment or tax programs, or financing advice
- Sanctions and export screening of renters
- Drafting LLC or hosting agreements
- Canadian residents with servers in a US data center
Can depreciation on GPU servers we rent out offset our W-2 income?
Only if the activity passes four gates, in this order.
| Gate | Question | If it fails |
|---|---|---|
| 1. Business | Is renting out the servers a real business, run for profit with continuity and regularity? | The income goes on Schedule 1, not Schedule C; the at-risk limit still applies, and whether a loss can reduce wages is unclear |
| 2. At risk | Is the money in the servers your own cash or a loan you are personally liable for? | The loss above your amount at risk waits for a later year |
| 3. Not passive | Is the activity outside the "rental activity" rules, and do you materially participate? | The loss can offset only passive income and waits for a later year or a sale |
| 4. Loss cap | Is your total net business loss within $256,000 ($512,000 joint)? | The excess becomes a net operating loss carryforward |
A partner or LLC member also needs enough basis first: roughly, what they put in plus their share of the partnership's debts and income, less distributions and earlier losses (Publication 925; Publication 541). How much depreciation the servers produce, and when, is covered in Writing off GPU servers.
What makes a case not simple: financing tied to the host, a host that does the work, several co-owners, a sale, or reserved contracts that change the average rental period. Gather the hosting agreement, the loan papers, marketplace rental logs and payout statements, and a record of your own hours.
Is renting out GPUs by the hour a rental activity or a business?
Usually not a "rental activity", if the average customer keeps the GPUs seven days or less. Whether it is a business is a separate test (Schedule E instructions). The distinction matters because a rental activity is passive even if you work in it full time (Publication 925).
An activity is a rental activity when customers pay mainly for the use of tangible property, real or personal, whether under a lease, a service contract or another arrangement. It is not one if any exception applies (26 CFR 1.469-1T(e)(3)(ii)), including:
- the average period of customer use is seven days or less;
- the average is 30 days or less and the owner, or someone on the owner's behalf, provides significant personal services. Only services performed by individuals count, so automated provisioning does not;
- extraordinary personal services are provided, so that the customer's use of the property is incidental to the services.
Short-term rental homes use the same test; see Rental property taxes.
What can flip the answer?
- Reserved contracts and renewals. Each continuous or recurring right to use an item, including renewals of the same agreement, is one period of customer use (26 CFR 1.469-1(e)(3)(iii)). A 12-month reserved contract counts as one 365-day period, not 365 one-day rentals.
- Mixed fleets. With on-demand and reserved rentals, the overall average is each type's average, weighted by its share of rental income, so a few reserved contracts can push the average past seven days.
- Who the customer is. If your hosting agreement leases the servers to the host for a fixed monthly fee and the host resells the compute, the host may be your customer, with a long right to use. Read who holds the right to use the servers under your agreement.
No IRS guidance addresses GPU marketplaces directly; the tests above apply as written.
The real estate professional exception and the special $25,000 allowance cover rental real estate only, so equipment leases cannot use either (Publication 925; Schedule C instructions, Line G).
Do we materially participate if a host or marketplace does the work?
Often not. Outside the rental rules you must still materially participate, by meeting one of seven tests. The three that usually matter here are (Publication 925):
| Test | What it needs | Where the host's staff count |
|---|---|---|
| More than 500 hours | Your hours alone | Not relevant |
| Substantially all participation | Your work is nearly all the work done by anyone | Counts against you, including people who own nothing |
| More than 100 hours and not less than anyone else | Over 100 hours, and at least as many as any other individual | The host's technicians count against you |
Other rules:
- Investor work does not count. Reviewing statements, dashboards or reports, or monitoring finances, is investor work unless you are directly involved in day-to-day management or operations.
- Facts and circumstances test. Needs over 100 hours, and management work does not count if anyone else is paid to manage the activity or spends more hours managing it than you.
- Your spouse's hours count; work an owner would not usually do, done mainly to pass the test, does not; and a calendar or narrative summary backed by marketplace records can prove hours, without daily logs.
- Limited partners can qualify only under the 500-hour test or the two prior-year tests. Whether an LLC member counts as a limited partner here is unsettled: the regulation treats an interest as limited when state law limits the owner's liability (26 CFR 1.469-5T(e)(3)), and LLC members usually have that protection.
We financed the servers: are we at risk for the loan?
Only for a loan you are personally liable for, or secure with property outside the activity, from a lender with no other stake in the activity. Leasing depreciable equipment is an activity covered by the at-risk rules (Publication 925). You are not at risk for (Form 6198 instructions):
- Nonrecourse loans, where the lender can take only the servers if you do not pay. Qualified nonrecourse financing helps only real property, not equipment.
- Amounts protected by a guarantee, stop-loss or similar arrangement. Look for buyback or guaranteed-return terms in the hosting contract.
- Loans from anyone with an interest in the activity other than as a creditor, or from someone related to that person, even if you are personally liable.
Losses above your amount at risk wait, and can be used as your amount at risk grows, for example when you repay a loan that was not at risk with your own money (Form 6198 instructions). If the amount at risk falls below zero, for example after cash distributions or a loan changed to nonrecourse, earlier losses come back into income (Publication 925).
How much business loss can offset W-2 income?
Up to $256,000, or $512,000 on a joint return, of net business loss (Rev. Proc. 2025-32, section 4.31). The cap applies after the at-risk and passive rules, on Form 461.
- Wages are left out of the calculation, so they do not raise the cap (Form 461 instructions).
- The cap fell. It was $313,000 ($626,000 joint) for 2025. Public Law 119-21, section 70601, reset the inflation base year for years after 2025 (P.L. 119-21).
- The excess is not lost. It becomes a net operating loss carryforward, which can offset at most 80% of later taxable income. See Business losses.
Is GPU rental income business or investment income, and do we owe self-employment tax?
It depends on how you run it. A business has a profit motive and continuity and regularity (Schedule C instructions).
| How you run it | Where it goes | Self-employment tax |
|---|---|---|
| In the business of renting personal property | Schedule C gross receipts (Publication 334), or a partnership return | Yes, on profit; for LLC members see How partnerships are taxed |
| For profit, but not a business | Schedule 1, line 8l income and line 24b expenses (Form 1040 instructions) | No |
| No profit motive | Schedule 1, line 8j | No |
Equipment rental does not go on Schedule E, even though rental homes do (Schedule E instructions).
Self-employment tax is 15.3% on net earnings. The Schedule SE exclusion covers real estate rentals, not equipment (Schedule SE instructions). If your wages reach the Social Security wage base ($184,500), only the 2.9% Medicare part applies to the profit, plus the 0.9% Additional Medicare Tax above its threshold (IRS).
Profit from an activity that stays passive to you, or rent from one that is not a business, can bear the 3.8% net investment income tax above the income thresholds (IRS NIIT questions).
Section 179 expensing needs active conduct of a business, and owners who are not corporations face extra limits on property they lease to others (Publication 946). See Writing off GPU servers.
The marketplace sent a Form 1099-K: what do we report, and what do we send the host?
Report all rental income, with or without the form. A marketplace must send Form 1099-K when payments exceed $20,000 in more than 200 transactions, and may send one for less (IRS). The form reports payments, not profit; costs and depreciation go on your return. Give the marketplace your correct taxpayer identification number, often on Form W-9; without it, the marketplace must hold back 24% of payouts (IRS: Backup withholding).
If you pay an unincorporated host, repair contractor or technician $2,000 or more in a year, you may need to file Form 1099-NEC for services or Form 1099-MISC for rents (Publication 1099). The threshold will be indexed for inflation. Payments made by card or through a payment app are reported by the card company or app instead, and only payments made in a business count (Form 1099-MISC and 1099-NEC instructions).
A Form 1099-K that is wrong, duplicated or in the wrong name is covered in Online seller income tax.
Several of us bought the servers together: do we file a partnership return?
Usually yes. Mere co-ownership of rented property is not an entity, but co-owners who also provide services, directly or through an agent such as a host, form one (26 CFR 301.7701-1(a)(2)).
- Return. The partnership files Form 1065 by March 15 for a calendar year, or by the extended date. A late return costs $260 per partner for each month late, for up to 12 months (Form 1065 instructions).
- Each partner applies the limits separately. Basis, at risk, passive and the loss cap are tested partner by partner (Publication 925). One partner's hours do not make another nonpassive.
- Spouses. Couples who own the servers together should see Spouse and family LLCs.
What if renting out a GPU is only a hobby?
Renting out a home gaming card when it sits idle, with no profit motive, is usually a hobby. The income goes on Schedule 1, line 8j, and the costs give no deduction against it (Form 1040 instructions; Schedule C instructions). The profit tests are in Business losses.
What happens to the waiting losses when we sell the servers?
Suspended passive losses are generally freed when you dispose of your entire interest in the activity in a fully taxable sale to an unrelated buyer (Publication 925). Selling some servers while keeping the activity generally does not free them. Losses waiting under the at-risk rules are different: gain on the sale adds to your amount at risk, so they can be used to that extent (Form 6198 instructions).
Gain on the sale, up to the depreciation taken, is ordinary income; see Writing off GPU servers.
How does Canada compare?
| United States | Canada | |
|---|---|---|
| What limits using the loss | Rental activity test, material participation, at risk, and the excess business loss cap | A business non-capital loss can be carried back 3 years and forward 20 (CRA Guide T4002) |
| Leasing restriction | A rental activity is passive even with material participation | Specified leasing property rules reach leases longer than one year of tangible property worth over C$25,000; general-purpose data processing equipment in Class 45, 50 or 52 is exempt unless one item costs over C$1,000,000 (Income Tax Regulations, s. 1100) |
| Payroll-type tax on profit | Self-employment tax | CPP on self-employed business income (11.90% first rate) |
Canadian residents should see Writing off GPU servers in Canada.
Example
All figures are in US dollars and illustrative only.
Financed through the host, little personal work
A couple with $900,000 of wages files jointly. One spouse owns a single-member LLC that buys four eight-GPU servers at $300,000 each ($1,200,000), placed in service in a Texas colocation data center. They pay $240,000 in cash; the other $960,000 is a loan from a lender tied to the host, secured only by the servers. The host racks them and rents them out hourly through a marketplace; the couple spends about 20 hours reading dashboards.
Year one: $200,000 rental income, $80,000 of hosting, power, fees and interest, and $1,200,000 bonus depreciation, for a $1,080,000 loss.
- The hourly rentals make it not a rental activity.
- Only the $240,000 cash is at risk; the loan is nonrecourse and from a lender tied to the host. $840,000 waits.
- The $240,000 is passive: 20 hours of dashboard reading is investor work.
- W-2 income offset: $0.
Paid in cash, one spouse runs it
Same fleet, paid in cash; assume the same $1,080,000 loss. One spouse logs 600 hours on pricing, renters and repair calls; the host only supplies rack space and power.
- The $1,080,000 loss is nonpassive and fully at risk.
- $512,000 offsets wages (it would have been $626,000 for 2025).
- The other $568,000 becomes a net operating loss carryforward, usable against at most 80% of later taxable income.
If next year the whole fleet goes to one renter on a 12-month reserved contract, the activity becomes a rental activity: passive despite the hours.
Four friends in a partnership
Four friends each put $40,000 ($160,000 in total) into an LLC taxed as a partnership. It buys 130 used consumer graphics cards in rigs they run themselves, listed hourly on a marketplace.
Year one: $120,000 of payouts, with a Form 1099-K in the LLC's name; $40,000 of power, space and internet; $160,000 bonus depreciation. The $80,000 loss is $20,000 each.
- Two partners log about 300 hours each, and no one works more. That passes the 100-hour test; but if LLC members are treated as limited partners, only the 500-hour test is open to them, and their losses would also wait.
- The two who only funded the rigs are passive; their $20,000 each waits.
- The LLC files Form 1065 by March 15 (or its extended date), or faces $260 per partner per month, up to 12 months: $1,040 a month for four partners.
Different for you?
- Depreciation amounts, loss order or partnership mechanics: see Writing off GPU servers, Business losses, How partnerships are taxed and How LLCs are taxed.
- Host-linked financing or several co-owners: see our data center service.
- A corporation owns the servers: the loss stays in the corporation; see How C corporations are taxed.
- The servers sit in another state: registration, income or franchise tax and property tax are in Servers in a data center in another state.
- You bill renters directly: sales tax on compute is in Sales tax on colocation hosting and GPU compute.
- The servers are in a Canadian data centre: see Mining machines and GPU servers hosted in Canada.
- Evaluating a GPU investment or tax program, screening renters for sanctions or export rules, or drafting the agreements is outside this page.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Excess business loss threshold, returns other than joint returns Threshold for tax years beginning in 2026; see section 4.31 | $256,000 Tax year 2026 | IRS: Revenue Procedure 2025-32, section 4.31 Checked |
| Excess business loss threshold, joint returns Threshold for tax years beginning in 2026; see section 4.31 | $512,000 Tax year 2026 | IRS: Revenue Procedure 2025-32, section 4.31 Checked |
| Maximum rental real estate special loss allowance, single or joint Subject to active participation, income phaseout, and other loss rules | $25,000 | IRS: Publication 527 Checked |
| Excess business loss threshold for 2025, returns other than joint returns For tax years beginning in 2025 (Rev. Proc. 2024-40). Shown for comparison; the 2026 figure is lower. | $313,000 Tax year 2025 | IRS: Instructions for Form 461 (2025) Checked |
| Excess business loss threshold for 2025, joint returns For tax years beginning in 2025 (Rev. Proc. 2024-40). Shown for comparison; the 2026 figure is lower. | $626,000 Tax year 2025 | IRS: Instructions for Form 461 (2025) Checked |
| Limit on use of post-2017 NOL carryforwards General limit measured against taxable income computed under section 172; older NOLs can change the calculation | 80% | IRS: Instructions for Form 172 Checked |
| Self-employment tax rate 12.4% Social Security plus 2.9% Medicare, on net earnings from self-employment | 15.3% | IRS: Self-employment tax (Social Security and Medicare taxes) Checked |
| Social Security wage base Maximum combined wages and net earnings from self-employment subject to the Social Security part of the tax | $184,500 Tax year 2026 | IRS: Form 1040-ES (2026) Checked |
| Medicare part of self-employment tax No earnings cap; employers and employees each pay half on wages | 2.9% | IRS: Self-employment tax (Social Security and Medicare taxes) Checked |
| Additional Medicare withholding rate Employee-only tax on wages above the employer's annual withholding trigger | 0.9% Tax year 2026 | IRS: Publication 15, Employer's Tax Guide Checked |
| Net investment income tax rate Rate on the lesser of net investment income or modified adjusted gross income above the filing-status threshold | 3.8% | IRS: Net Investment Income Tax Checked |
| Federal Form 1099-K marketplace payment threshold Marketplace or payment-app payments must exceed this amount and exceed 200 transactions before federal third-party network reporting is required; payment-card transactions have no such threshold. | $20,000 | IRS: Understanding your Form 1099-K Checked |
| Backup withholding rate on reportable payments Current federal backup withholding rate for payments subject to the rule | 24% | IRS: Backup withholding Checked |
| Form 1099-NEC reporting threshold for payments made in 2026 Generally, reportable service payments to one payee during 2026; backup withholding can require filing at any amount | $2,000 Tax year 2026 | IRS: Am I required to file a Form 1099 or other information return? Checked |
| Calendar-year partnership and S corporation ordinary federal filing deadline Following year-end; weekend and holiday adjustments and qualifying overseas-books exceptions can change the date. | March 15 | IRS: Instructions for Form 1065 Checked |
| Federal late Form 1065 penalty per partner per month for returns due in 2027 Per partner at any time in the tax year, per month or partial month, for up to 12 months; rate applies to returns required to be filed in 2027 | $260 Tax year 2026 | IRS: Revenue Procedure 2025-32, section 4.55 Checked |
| Fair market value of leased tangible property above which the specified leasing property rules can apply Aggregate value of non-exempt tangible property under the lease, measured when the lease is entered into; Reg. 1100(1.11)(c) | C$25,000 | Justice Laws: Income Tax Regulations, section 1100 Checked |
| Capital cost above which a single computer item is not exempt from the specified leasing property rules General-purpose electronic data processing equipment in Class 45, 50 or 52; Reg. 1100(1.13)(a)(i.1) | C$1,000,000 | Justice Laws: Income Tax Regulations, section 1100 Checked |
| Self-employed CPP rate, base plus first additional contribution Combined employee and employer rate on eligible earnings up to the year's maximum pensionable earnings | 11.90% Tax year 2026 | Government of Canada: CPP rates and maximums Checked |
Primary sources
- IRS: Publication 925, Passive Activity and At-Risk Rules
- IRS: Instructions for Schedule C (Form 1040)
- IRS: Instructions for Schedule E (Form 1040)
- eCFR: 26 CFR 1.469-1, average period of customer use
- eCFR: 26 CFR 1.469-1T, rental activity exceptions
- eCFR: 26 CFR 1.469-5T, material participation
- IRS: Instructions for Form 6198, At-Risk Limitations
- IRS: Revenue Procedure 2025-32 (Internal Revenue Bulletin 2025-45)
- IRS: Instructions for Form 461, Limitation on Business Losses
- GovInfo: Public Law 119-21
- IRS: Publication 334, Tax Guide for Small Business
- IRS: Instructions for Form 1040, Schedule 1
- IRS: Instructions for Schedule SE (Form 1040)
- IRS: Self-employment tax (Social Security and Medicare taxes)
- IRS: Questions and answers on the Net Investment Income Tax
- IRS: Publication 946, How To Depreciate Property
- IRS: Understanding your Form 1099-K
- IRS: Backup withholding
- IRS: Publication 1099, General Instructions for Certain Information Returns
- IRS: Instructions for Forms 1099-MISC and 1099-NEC
- IRS: Publication 541, Partnerships
- eCFR: 26 CFR 301.7701-1, classification of organizations
- IRS: Instructions for Form 1065
- CRA: Guide T4002, Chapter 5, Losses
- Justice Laws: Income Tax Regulations, section 1100
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.