Cryptocurrency mining can be a very profitable business for individuals that set up large-scale mining operations with state-of-the-art hardware. There are companies that specialize in mining cryptos through so-called mining farms that consist of hundreds of interconnected mining rigs that produce new Bitcoin (BTC), Ethereum (ETH), Bitcoin Cash (BCH), Litecoin (LTC), or other trending Proof-of-Work coins and tokens and make large incomes.
However, huge profits from crypto mining also incur serious tax filing obligations in all countries which have legally regulated crypto mining as a taxable, capital gains event. The fact that you can earn a lot of money through the use of advanced computer hardware is enough for tax authorities to treat crypto mining as a source of income, just like any other business.
But not all crypto mining is done with the aim of gaining huge financial profits, in fact, there are thousands of low-scale miners that are engaging in crypto mining with their PC or a single mining rig in order to obtain some crypto coins for the purpose of holding them as a store of value. Today, we’ll talk a little bit more about these so-called hobby miners.
How Does Cryptocurrency Mining Work?
Cryptocurrency mining is mainly done with cryptocurrencies that are based on a Proof of Work consensus mechanism. These cryptos have decentralized blockchain networks that require network nodes to check and verify each blockchain transaction before the transferred coins can reach their final destination. When a user sends out a transaction, the funds travel through the blockchain in the form of a cryptographic message whose validity needs to get verified by miners.
Miners and their computers or mining rigs play the role of network nodes in PoW based blockchains. Since there’s no single, central authority that validates transactions, the transfers are validated by random miners who pick transactions from the memory pool of pending transfers. Once a miner selects a transaction, their computer works to find the appropriate transaction hash by means of trial and error. The rate at which a mining rig tries possible combinations is called a hash rate.
Finding appropriate hashes is quite complex and it can take a lot of time and computing power. For this reason, thousands of miners join forces in online mining pools to combine their hashing power and find transactions hashes faster. Members of a mining pool share block rewards between themselves.
This is how new bitcoins are mined, but the process is very similar to most other PoW cryptocurrencies. The block rewards are the key incentive for miners to verify transactions on the blockchain. Now imagine how profitable Bitcoin or Ethereum mining can be for individuals or companies that own multiple rigs with a huge combined hashing power.
Bitcoin Mining Options
Bitcoin is definitely the most popular crypto for mining, because of the enormous value of a single Bitcoin, which is more than ten times the value of an Ether token. Let’s take a look at the various types of BTC mining options.
When Bitcoin was launched back in 2009, there weren’t many miners at the time and you could efficiently mine BTC with your PC or laptop’s CPU. CPU mining was an easy and practical way for crypto enthusiasts to get in on the action and earn some coins by validating transactions.
However, in just a couple of years, CPU mining became obsolete, because miners realized that they could mine much more BTC with GPU-based mining rigs. You can still mine BTC with your CPU today, but the hash rate and mining rewards are so low that you can’t expect any serious income.
GPU mining is the most popular type of Bitcoin mining operation in which thousands of crypto enthusiasts engage from their homes. Graphics processing units have far better hash rates than CPUs and that’s why Bitcoin miners build mining rigs with a minimum of two and a maximum of eight GPUs that are interconnected, put inside of a rig frame along with an appropriate cooling system to handle the excess heat from the GPUs.
Putting together a strong mining rig can be quite expensive, especially if you choose to buy more than two strong GPUs, but the initial investment can get refunded in just a few months if you set your mining operation right and take into account all expenses such as electricity costs.
ASIC mining is conducted with ASIC miners which are specialized machines made with only one purpose, to mine a certain digital currency. These machines are so powerful that they leave GPUs far behind in terms of hashing power, but they also consume far more electricity and generally, these machines are used by large-scale crypto mining operations and mining farms.
Single crypto miners generally rely on their mining rigs and don’t invest in ASIC machines.
In case you don’t want to engage in Bitcoin mining directly by building or buying a rig, or you simply don’t have the time and knowledge to maintain a mining rig, you can always engage in cloud mining.
Cloud mining works by buying hashing power from companies that own mining farms and paying a fee of your earnings to the company, which in turn sends you your freshly mined coins to your crypto wallet.
What Does Hobby Mining Mean?
In case you’re just mining with a single mining rig, running a modest mining operation with a plan to keep those coins as a store of value, you’re probably a hobby miner. Hobby mining is when you mine cryptos on an irregular and time-to-time basis. There’s also the volume of mined cryptos. If you have just a single mining rig, you can’t really profit considerably, but if you have multiple connected mining rigs, you’re engaged in serious crypto mining activities, which can be considered by tax authorities as a crypto mining business.
What Does Commercial Mining Mean?
Commercial crypto mining, on the other hand, represents all mining operations with a clear intent to gain profit from further investments of your new coins or crypto trading. If you have multiple rigs or a private mining farm with numerous rigs or ASIC miners, it’s apparent that you’re in the business of making a living from mining and this will be taxed accordingly as a profitable business.
No matter the type of crypto mining you’re engaged in, you mustn’t forget to file your cryptocurrency taxes and pay them on time. In a lot of countries where cryptos fall under local tax regulations, hobby miners aren’t taxed right away for mining cryptos because those cryptos are only subject to tax at the moment you sell them and create a capital gains event.
If you’re a hobby miner who sold and made a profit from mined cryptos after at least 12 months of holding them, only 50% of your profits will be subject to taxation. In case you sold your newly mined cryptos after less than 12 months of holding them, 100% of your profits will be subject to taxation. The cost base for calculating your taxes is the fiat value of the crypto you sold at the time when you sold it.
For commercial miners, all gains and losses are usually subject to taxation rules applicable to businesses. You should check your local crypto tax regulations in order to be in the loop with the capital gains tax, income tax, and tax return rules. It’s a good idea to consult a crypto tax professional when filing your crypto taxes for the first time or to use tax software to automatically file your crypto taxes, based on your crypto wallet transaction history.
Whatever you do, don’t try to evade taxes because that’s a serious felony in most countries. In the US for example, trying to trick the IRS can even land you a prison term, which is something you definitely don’t want to happen.
A Few Final Words…
If you plan to engage in mining cryptos, it’s important to know how mining works in advance and realize what are the necessary investments and possible risks. You can earn some nice side cash from hobby mining or you can just stash those mined coins and keep them as a store of value hoping that the coins you’ve mined will grow in value over time. In any case, don’t forget to pay your crypto taxes, regardless of whether you’re a hobby miner or a commercial one.