Crypto Mining- How Does It Work? Do You Have To Pay Mining Crypto Taxes

Mining crypto taxes is a process where transactions related to Bitcoin and other cryptocurrencies are processed and verified. Crypto miners who employ massive, decentralized networks of computers verify transactions and add them to the blockchain. In exchange, miners are rewarded with fresh coins for their contributions to verifying the transactions and keeping the blockchain safe. 

While mining is a resource-intensive task, it can be a very lucrative venture. Miners can make a significant amount of profit with crypto mining. But, with crypto mining comes mining crypto taxes. In this guide, we will touch upon crypto mining taxes and other topics related to crypto mining.

How Does Crypto Mining Work?

As we already know, crypto mining secures the network and verifies the transactions. To become a miner, one requires a computer and specialized hardware and software to solve intricate math puzzles faster than their peers. 

With the resources in place, miners start to audit and verify transactions and ensure that there is no double-spending. The process starts with a calculation of a 64-digit hash and a miner needs to zero in on the hash value, which is below the target using their computational power. 

This mining process is called proof-of-work (PoW). The most mined cryptocurrency at the moment is Bitcoin, but other cryptocurrencies are catching up as they are being adopted as a medium of exchange.

The High Cost of Crypto Mining

The biggest roadblock in front of crypto miners is the high computational power. It not only requires a significant investment upfront but also requires a lot of electricity to power the specialized hardware, running up a big electricity bill. 

When Bitcoin was launched in 2009, mining this coin was easy as there were only a few hundred miners who understood the concept. However, as more and more miners got involved, the mathematical problems got increasingly complex. As a result, miners invested in powerful resources and upgraded their mining setup to beat other miners. 

With this level of complexity, crypto mining has now become a resource game that is won by wealthy individuals and large corporations with sufficient resources. These corporations set aside a huge amount of money to build mining rigs with high computational prowess to earn profits.

How to Reduce This Cost?

To make crypto mining profitable, miners should reduce the cost of resources. After all, they have to pay mining crypto taxes, which can also eat into their profits. There are ways they can reduce mining costs such as:

Cloud Mining Pool

Mining pools are an excellent way to save money while mining. Cloud mining is a process where miners use rented cloud computing power without having to install and run related hardware and software. Miners can open an account with a cloud mining firm and remotely partake in the mining process for a basic fee. 

Since it is done through cloud computing, miners don’t have to worry about energy costs or equipment upkeep. In return, the profits are shared among the poolers proportionately. 

Is Crypto Mining Taxed?

The IRS is taking measures to stop crypto tax evasion and allowing more resources toward it. 

As per the IRS Notice 2014-21:

If any taxpayer’s “mining” of the virtual currency constitutes a business or a trade, and the activity of “mining” isn’t undertaken by the taxpayer (or the employee), the net earnings from self-employment (generally, the gross income from carrying on a business or trade less allowable deductions) that results from the activities constitute of self-employment income and subject to self-employment tax.

In simple terms, if you mine cryptocurrency, you have to pay mining crypto taxes. 

To Summarize

Mining cryptocurrency is a great source of passive income, but many people are locked out due to the high cost of mining. Miners can reduce this cost by pooling their resources and mining via cloud mining. This reduces the mining costs, which is helpful because after paying mining crypto taxes at the end of the year, miners would be left with a significant amount of their income. 

FAQs

1. Do you have to pay taxes on Bitcoin mining?

Yes, miners have to pay taxes on Bitcoin mining. As per the IRS, if a miner mines crypto as a hobby or a business, they have to pay mining crypto taxes. This regulation is as per the IRS Notice 2014-21. 

2. Can the IRS track crypto mining?

Yes, the IRS can track crypto mining. The transactions are publicly visible on a blockchain and the IRS is making efforts in analysing and understanding blockchain transactions and pinpointing anonymous wallets. 

3. Is Bitcoin Mining Legal?

Whether Bitcoin mining is legal or not, entirely depends on the geographical location of the miner. Bitcoin and other cryptocurrencies can negatively impact the fiat currency of a country and government control over financial markets. Therefore, Bitcoin trading, investing, and mining is illegal in certain countries.

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