What is Mining
Crypto mining - what is it? Is it a group of crypto enthusiasts in a mine with pickaxes hacking away at rocks? Is it crypto users setting up traps on the internet to hack the wallets of everyone possible? No, and no.
Crypto mining is a term that refers to the process of gathering cryptocurrency tokens as a reward for work that the ‘miner’ has completed. A miner gains these tokens by racing to solve cryptographic equations through the use of computers, validating data blocks and adding transaction records to the blockchain as they go. The first to solve the cryptographic equation is rewarded with the token that they’re mining.
Crypto, and particularly crypto mining, incorporates a whole new language into its processes. We've listed below the most common of which you’ll come across whilst mining:
Common Crypto Mining Terms
- Miners: Contributors to a blockchain taking part in the process of mining. They can be professional miners or organizations with large-scale operations, or hobbyists who set up mining rigs at home or in the office.
- Transactions: The act of exchanging cryptocurrencies on a blockchain. Every transaction is recorded on the blockchain.
- Blocks: A file containing information on transactions completed during a given time period. Blocks are the constituent parts of a blockchain.
- Blockchain: A distributed ledger system. A sequence of blocks, or units of digital information, stored consecutively in a public database. The basis for cryptocurrencies.
- Consensus algorithm: A consensus mechanism is an underlying technology behind the main functionalities of all blockchain technology, which makes them an essential operating feature of all cryptocurrencies.
- Nodes: The most basic unit of blockchain infrastructure that stores data.
- Hashes: A hash is the output result of a hashing algorithm, which creates a unique, fixed-length string to encrypt and secure a certain selection of arbitrary data.
- Nonces: When a transaction is hashed by a miner, an arbitrary number meant to be used only once is generated, called a nonce.
How does crypto mining work?
How is crypto mining taxed?
As with almost anything tax-related in the crypto world, how you are taxed on your crypto mining activity depends on where you live, the scale of your activity, and the amount you’ve earned.
In most regions, both income tax and capital gains tax are relevant to crypto mining. It is likely that any rewards gained from mining crypto will be treated as taxable income, with the market value of the token you were rewarded considered relevant at the time of receipt. If you choose to then sell your rewards gained from mining crypto, you will likely incur capital gains tax. The market value of the token on the day you received it as a reward will form your cost basis in this context. If you are mining crypto as an official business, you will likely be able to claim any relevant expenses incurred such as:
- Equipment expenses
- Electricity costs
- Equipment repairs
CryptoTaxCalculator provides categorization options for crypto mining related transactions. You can mark any rewards earned as ‘mining’, which will automatically apply the relevant tax rules to each reward transaction. If you’ve sold these rewards, the algorithm will be able to recognize this and apply the corresponding tax rules to these transactions as well.
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