Your Guide to Crypto Mining
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Crypto miners generate Bitcoin and other cryptocurrencies, verify transactions on proof-of-work blockchains, and receive rewards in return.
Crypto miners use enormous amounts of computing power to create and stack blocks of transactions in the right order and in a fashion that can be mathematically proven and traced, ensuring Bitcoin and other cryptocurrencies like it can be securely traded.
What is crypto mining?
Those new to crypto often wonder “What is crypto mining and how does it work?” Simply put, crypto mining generates Bitcoin and other cryptocurrencies 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 contributing 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.
Why is 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.
Different methods of crypto 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.
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.
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.
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.
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 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.
Do you pay taxes on crypto mining?
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. Those outside the US can look to our helpful country guides for more information.
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.
US-based crypto miners of Bitcoin, Ethereum, or other crypto should expect to pay tax on crypto mining as both:
Regular income at the time of mining.
Crypto capital gains when the mined tokens are disposed of at a later date.
Income from mining (rewards) is not taxed twice unless the crypto is disposed of later, at which point the usual capital gains rules apply. For more information, see our articles on how to report cryptocurrency on taxes and how to calculate crypto taxes.
If the crypto you’ve mined decreases in value, you might benefit from our guide to crypto tax-loss harvesting as a means to minimize capital gains taxes.
How do I file taxes for mining cryptocurrency?
How a crypto miner will report mining activity on taxes will depend on their region and whether the crypto mining income originated from hobby or business activity. As noted, US-based taxpayers should anticipate taxes on their mined crypto as both income and capital gains.
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.
For a complete breakdown of how to file taxes for mining cryptocurrency for US taxpayers, see our comprehensive guide to crypto mining taxes.
Frequently asked questions
Here are answers to some frequently asked questions about crypto mining, what is crypto mining, and what is crypto mining in simple terms.
What is crypto mining and how does it work?
What is crypto mining in simple terms? Crypto mining is the means by which new cryptocurrencies are created. Miners use computational power to solve extremely complicated math problems that in turn verify transactions for the currencies. When a miner successfully mines a given crypto, they receive a predetermined reward.
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.
Why 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.
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