Bitcoin Mining: What Is It and How Does It Work?

Zac McClure
ByZac McClure, MBAReviewed byArthur Teller, CPAUpdated on November 1, 2024 · minute read
VerifiedExpert verified

TokenTax content follows strict guidelines for editorial accuracy and integrity. We do not accept money from third party sites, so we can give you the most unbiased and accurate information possible.

  • Crypto miners produce Bitcoin and other cryptocurrencies by verifying transactions on proof-of-work blockchains, earning rewards in the process.

  • Bitcoin operates on a decentralized network that records cryptocurrency transactions. When network computers verify and process these transactions, new bitcoins are created, or "mined."

  • Blockchain technology powers Bitcoin and many other cryptocurrencies. This decentralized ledger records all transactions on the network, grouping verified transactions into blocks that link together to form a continuous chain.

What is Bitcoin mining?

Crypto mining generates Bitcoin and other cryptos and verifies transactions on blockchains. The process involves large, decentralized computer networks that verify and secure blockchains. Those who participate in this activity are called crypto miners.

In exchange for computing power, crypto miners receive new tokens as a reward. By providing processing power, crypto miners help secure and maintain blockchains and are rewarded in return.

Not all cryptocurrencies rely on or support mining, or “proof-of-work” (PoW). Some depend instead on “proof-of-stake” (PoS), which is more energy efficient and involves putting some amount of crypto at risk to submit a new block and earn a reward. Ethereum notably converted to PoS in 2023, for example.

"Crypto mining can be lucrative and comes with tax challenges every miner needs to understand. Miners operating in the US must know the IRS considers mined crypto taxable income, which needs to be reported. I recommend crypto miners keep complete records of their mining activities and stay informed about the latest tax rules. This will allow effective management of tax liabilities and hopefully avoid surprises down the road.”

— Ty Gaines, EA, Tax Expert at TokenTax

Why is Bitcoin mining important?

Mining is an essential part of the crypto ecosystem and blockchain technology. Cryptocurrency mining:

  • Validates transactions in order to maintain the integrity of a given blockchain.

  • Maintains an accurate ledger of transactions upon which a given PoW cryptocurrency is based.

In short, crypto mining uses enormous amounts of computation power to create and stack blocks of transactions in the right order and in a fashion that can be mathematically proven and traced. Without this, users would not be able to securely transfer their funds and Bitcoin would not exist.

Is Bitcoin mining profitable?

The profitability of Bitcoin mining remains uncertain despite its potential success. High initial equipment costs and ongoing electricity expenses could outweigh earnings.

According to a 2019 report by the Congressional Research Service, the electricity consumption of one ASIC can rival that of half a million PlayStation 3 devices.

Moreover, as Bitcoin mining becomes more challenging and intricate, the necessary computing power continues to escalate.

ChatGPT said: ChatGPT As of 2024, Bitcoin mining is estimated to consume around 143 terawatt-hours (TWh) of electricity annually, according to the Cambridge Bitcoin Electricity Consumption Index (CBECI). While this is slightly lower than in past years, it still surpasses the energy consumption of many countries, comparable to nations like Norway or Argentina​.

Mining one bitcoin in 2024 requires as much electricity as an average US household consumes in about six to seven years, reflecting the high energy demands of the mining process. This is a significant factor in ongoing debates about the environmental impact of Bitcoin mining.

Benefits of joining a mining pool

One way to share some of the high costs of mining is by joining a mining pool. Mining pools allow crypto miners to share resources and add more capability, but shared resources also mean shared rewards which lowers the payout when working through a pool.

The ongoing volatility of Bitcoin’s price also makes it difficult to calculate exactly how much you’re working for.

How to start Bitcoin mining

Here are the basics you’ll need to start mining Bitcoin:

  • A crypto wallet. This is where any Bitcoin you earn as a result of your mining efforts will be stored. A wallet is an encrypted online account that allows you to store, transfer and accept Bitcoin or other cryptocurrencies. Check out the best crypto wallets reviewed by our experts.

  • Mining software. In order to mine Bitcoin you'll need a crypto mining software many of which are free to download and can run on Windows and Mac computers. Once the software is connected to the necessary hardware, you’ll be able to mine Bitcoin. We reviewed the best Bitcoin mining software for you already.

  • Computer equipment. The most costly aspect of Bitcoin mining involves the hardware. You’ll need a powerful computer that uses an enormous amount of electricity in order to successfully mine Bitcoin. Pricing for hardware to mine crypto can run around $10,000 or more. Here's an overview of the best crypto mining hardware for you to consider.

Different methods of Bitcoin mining

Here’s a brief overview of the different methods of crypto mining. Miners can either mine crypto on their own or join a mining pool and share resources (and rewards) with other miners. Many companies offer software services and hardware to support new and established crypto miners in their efforts.

CPU Mining
In the early days of crypto mining, Bitcoin miners used central processing units (CPUs) to mine cryptocurrencies. Miners used mining software such as cpuminer to efficiently mine hash rates up to 10MH/sec. Now, however, mining with CPUs is not profitable for popular cryptocurrencies like Bitcoin. Some coins such as Monero (XMR) can still be mined profitably using CPUs.

GPU Mining
As demand for crypto mining increased, crypto miners turned to graphics processing units (GPUs) alongside CPUs. GPU mining is much more powerful and efficient than CPU mining. 

FPGA Mining
Field-programmable gate array miners (FPGA) are even more efficient than GPU miners. They are also flexible and adaptable and can be programmed to mine different cryptocurrencies, but they are energy-intensive.

ASIC Mining
Application-specific integrated circuit miners (ASICs) are specifically designed for Proof of Work (PoW) computations, and they perform far faster than general-purpose computing devices like GPUs or CPUs and are more energy efficient than FPGA miners. ASIC-based mining has a high barrier to entry in terms of cost and units cannot be used for any other task than mining a particular coin.

Cloud Mining
Cloud mining allows people to mine and earn cryptocurrency without the need to buy, install, or maintain specialized hardware or software. Miners can rent an ASIC and use cloud computing capability to augment or replace local computing resources.

Bitcoin mining risks

Here are some of the risks associated with Bitcoin mining:

1. Price Volatility: Since its inception in 2009, Bitcoin's price has experienced significant fluctuations.

For instance, between November 2021 and now, Bitcoin's value has swung from under $20,000 to an ATH of over $73,000. Such volatility challenges miners who struggle to predict whether their mining rewards will offset the substantial costs.

2. Regulatory Uncertainty: Cryptocurrencies like Bitcoin have not been universally embraced by governments, and many remain skeptical due to their decentralized nature.

There is a constant risk that governments might impose restrictions or outright bans on Bitcoin mining and other cryptocurrencies. In 2021, for example, China prohibited Bitcoin mining, citing financial risks and excessive speculation.

These factors underscore the unpredictable nature of Bitcoin mining, affecting its profitability and operational viability.

Do you pay taxes on crypto mining?

Yes - crypto mining rewards are as income upon receipt. Income from mining (rewards) is not taxed twice unless the crypto is disposed of later, at which point the usual capital gains rules apply.

Crypto mining taxes vary by region, and there are some crypto tax free countries where crypto mining may not be taxed. US-based crypto miners will typically pay crypto mining tax on both income from rewards and capital gains upon the sale of coins from mining activity.

Crypto mining taxes typically differ between hobbyists and those who mine professionally. Miners who operate under a business may, for example, be eligible for tax deductions.

Report cryptocurrency mined as a hobby on your Form 1040 Schedule 1 on Line 8 as “Other Income.” This income is taxed at your income bracket's tax rate. Report crypto mined as a business activity as income on Form 1040 Schedule C.

Read on how to calculate crypto taxes.

Bitcoin mining statistics

Here's a breakdown of some key statistics around Bitcoin mining.

  1. Current Reward: Following the Bitcoin halving in April 2024, miners now earn 3.125 Bitcoin per block. At a Bitcoin price of around $61,000, this is approximately worth $190,625.

  2. Electricity Consumption: Bitcoin mining consumes about 176 terawatt-hours (TWh) of electricity annually, comparable to the energy usage of countries like the Netherlands.

  3. Energy Efficiency: The electricity cost per Bitcoin mined is expected to increase to approximately $34.9k post-halving, with an average cost of around $0.046/kWh.

  4. Price Volatility: Bitcoin's price peaked at $73,750 in March 2024. As of October 2024, it trades at around $62,000.

  5. Mining Difficulty: As of October 2024, the Bitcoin mining difficulty reached an all-time high of 92.67 trillion, marking an increase in the complexity and competitiveness of the mining process. This new high reflects the growing computational power required to secure the network and mine new blocks​

  6. Leading Mining Countries: The US continues to lead in Bitcoin mining, with about 37.8% of the global hash rate, followed by China and Kazakhstan.

Bitcoin mining FAQs

Here are answers to some frequently asked questions about crypto mining, what is crypto mining, and what is crypto mining in simple terms.

How do I start mining crypto?

To start mining crypto, first choose the cryptocurrency you’d like to mine. From there, purchase mining equipment, create a crypto wallet, configure your mining devices, and, if you aren’t mining at scale, consider joining a mining pool to share resources and rewards with a group of fellow miners.

You may also want to create a crypto LLC specific to your mining undertaking, in order to deduct expenses like equipment and electricity.

Is crypto mining illegal?

Crypto mining is by and large legal in the United States, except for the State of New York. Crypto mining is also illegal in certain countries, including Algeria, Bangladesh, China, and Qatar. Concerns over risks to the stability of fiat currency and energy consumption largely drive prohibitions against crypto mining.

How long does it take to mine one Bitcoin?

Theoretically, a miner could mine a block of Bitcoin in 10 minutes (the average BTC transaction time). This would require the computational power of approximately 3,000 mining rigs, roughly a $10m investment. Most miners can mine a whole Bitcoin in 30 days.

To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

Zac McClure
Zac McClureCo-Founder & CEO at TokenTax
Zac co-founded TokenTax after his career in international finance and accounting at JPMorgan, Imprint Capital and Bain. He has worked in more than half-dozen countries and received his MBA from the UPenn Wharton School.
Arthur Teller
Reviewed byArthur TellerCOO (Former) at TokenTax
Arthur came to TokenTax after 12 years at KPMG. A specialist in partnership taxation and enterprise tax software, he is a licensed CPA in both California and Illinois and a member of the AICPA.

Get a personalized crypto tax consultation.

Complete our questionaire and we'll evaluate your situation — for free.