What is a Crypto Mining

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Crypto Mining Explained

In the crypto space there are all sorts of colloquialisms used to describe what activities are taking place. One of which is “crypto mining.” In this article we’ll breakdown exactly what crypto mining is, crypto mining as a business, and the financial advantages that may come from a cryptocurrency mining business.

How Does Crypto Mining Work?

When thinking of crypto mining, one metaphor that works best is comparing it to the California Gold Rush. From 1848-1855 America experienced the California Gold Rush. Gold was discovered in Sutter’s Mill, located in California, the word got out and suddenly hundreds of thousands of people migrated to California to mine for gold and get rich. We are currently seeing a similar situation in the digital landscape. Word has gotten out about the potential to get rich by mining for crypto. We’re seeing a rush of miners in the digital space, all working towards unearthing the answers to complex mathematical problems with the reward of new crypto coins. Let’s break this down.

Cryptocurrency mining, also known as cryptomining, is the process of using high-tech computers that solve complex mathematical equations that verify cryptocurrency transactions between peer-to-peer users, which is then added as a “block” on a blockchain public ledger. The first miner to solve the math equation that verifies the legitimacy of transactions is rewarded with a new coin. Essentially, cryptominers are accomplishing two things. One, miners are verifying crypto transaction “blocks” which are added to a blockchain. Two, miners are receiving payment in new crypto coins, thus releasing a new digital coin into circulation in the cryptocurrency market.

How Can I Become a Crypto Miner?

There are essentially two parts to becoming a crypto miner.

The first part to becoming a crypto miner is that certain crypto miners needs to verify 1MB worth of transactions also known as a “block.” To verify 1MB worth of transactions, the miner must solve extremely complex mathematical equations/puzzles using hardware like a central processing unit (CPU), a graphics processing unit (GPU), or an application-specific integrated circuit (ASIC (ASICs are specific to mining Bitcoin). One megabyte worth of transactions can be anything from one transaction to thousands of transactions. Verifying transactions is used as a way to prevent double-spending. Double-spending is considered fraud because it is a manipulation of a blockchain network as a way to spend one digital currency twice. Part of crypto mining is to solve the mathematical equation that verifies crypto transactions, which prevents fraudulent double-spending and keeps the blockchain network trustworthy.

The second part to becoming a crypto miner is that a miner is rewarded/paid in cryptocurrency once they have solved the mathematical puzzle. The solution to the mathematical puzzle is a 64-digit hexadecimal code also known as a hash. There is a stipulation to this, however. The miner must be the first miner to solve the mathematical puzzle. Once solved, crypto coins are released, and the miner is rewarded/paid with those released crypto coins.

Is a Crypto Mining Business Legal?

There are two ways to get some skin the crypto game. One, you can purchase cryptocurrencies using fiat money. Two, you can become a crypto miner or own a crypto mining business to earn cryptocurrency rather than purchasing it. In the U.S. there are few jurisdictions that have put regulations on cryptocurrency as a whole. Technically, crypto mining is legal in the U.S. but before establishing your crypto mining business check the laws within your jurisdiction.

Where Is Crypto Mining Legal?

Generally speaking, in the United States, if the state allows you to own and use crypto then crypto mining is legal as well. However, there are certain states where it is more advantageous to start a crypto mining business due to the states’ favorable crypto and business laws, lower electric power and tax rates, and high internet speeds. As of December 2021, states favorable to crypto mining include Florida, Texas, Ohio, Wyoming, Montana, and North Dakota.

Outside of the United States, as of 2021, countries that have banned crypto mining or have strict rules on transacting with cryptocurrency are China, Russia, India, Algeria, Bolivia, Egypt, Colombia, Indonesia, Vietnam, Turkey, Nepal, and North Macedonia.

Crypto Mining Business Plan

Mining cryptocurrency can be an expensive and risky business venture but is doable for anyone who is willing to invest in the business. Below are some guidelines to starting a crypto mining business.

    You will need to have a business plan. This involves doing your market research on what you are planning to mine (i.e., Bitcoin or altcoins); competitive research; a strengths, weaknesses, opportunities, and threats (SWOT) analysis; and an understanding of the upfront costs to establish the business as well as ongoing costs to run the business. Essentially, you’ll need to conduct a cost benefit analysis. The cost of starting a crypto mining business includes hardware like CPUs, GPUs, or ASICs; a large amount of power to run such complex computer systems; a reliable internet connection; a physical location that is kept cool as to not overheat the hardware; as well as other costs to conduct business. All of these upfront and ongoing expenditures should be included in your cost benefit analysis.

    Decide on a company name and establish a legal business entity like an LLC. Establishing a limited liability company (LLC) will give you flexibility on taxes owed and business operations, it will protect you and your assets from personal liability should the business go into debt or is sued as well as other legal protections for you and your new business.

    Register the business name. There are several different ways a crypto mining business can and should register its name. Such ways are as an entity name that is protected at the state level, trademark the name at the federal level, purchase a domain name for the business website, and a Doing Business As (DBA), which is a fictitious or assumed name that can be registered with the state, country, or city of your business location. A DBA may provide legal protection especially from intellectual property infringement depending on the location of the business.

    Apply for an EIN. An Employer Identification Number (EIN) is a federal tax identification number required of all businesses to pay federal taxes, apply for business licenses, hire and pay employees, and open business bank accounts. An EIN can be obtained by application through the ⦁    IRS.

    Apply for a state tax ID number. Not every U.S. state requires a business to apply for a state tax ID. State tax IDs are only required if that state the business is registered in requires business taxes.

    Apply for business permits and licenses. Check your local jurisdiction for types of business permits and licenses necessary to operate federally, by state, and in accordance with the city or county the business is registered in.

    Open a business bank account. It’s essential to separate your personal bank accounts and assets from the business bank accounts. Any new business owner will want to create a business bank account to avoid certain types of financial liabilities, avoid risk of legal action that could potentially expose personal financial records, and to keep taxes separate and uncomplicated. To do so, you’ll need to provide an EIN, business formation documents, licenses, and other legal documentation. 

    Protect your IP. Intellectual property (IP) is a business’ trade secrets, copyrights, trademarks, and patents that are legally protected from unauthorized use. It can take more than five years to officially register your IP so it is a must to protect it right away. There are several legal requirements to register your business’ IP and consulting an experienced IP attorney can guide you through that process.

    Identify potential liabilities. Crypto mining businesses come with a number of liabilities and risks. Liabilities are things that can go wrong in the business. Identifying those liabilities, retaining your legal counsel, establishing appropriate contractual agreements, applying for business insurance, and utilizing financial instruments will help protect your new business from potential legal and financial harm.

    Solidify contracts. Once you’ve registered your business; applied for the appropriate tax IDs, permits, and licenses; and are ready to get started, you’ll want to have irrefutable, legal contracts in place for everything from an agreement on services to employment to vendor relationships. Solid contracts will eliminate any miscommunications and will stand up in court should there be a breach of contract.

    Go to market. As soon as you complete the above administrative tasks it is time to build the business and go to market. Going to market will include marketing your company via a website, creating a social media presence and actively engaging on those social media channels, advertising, own and earn positive public relations, expand reach through email campaigns, plus much more. Additionally, you may need to acquire funding for your crypto mining business. If you need funding, at this point would be the time to create a pitch deck and target prospects to raise venture capital.

    Start mining. Once you have done your market research; started marketing; attained funding; and acquired the necessary legal business registrations, permits, licenses, tax registrations, and contracts, start mining your crypto.

Do I Need an LLC for a Crypto Mining Business?

If you are interested in starting a crypto mining business, it is advisable to establish an LLC for your business as the crypto industry is highly volatile and risky. An LLC is a U.S. business structure that has multiple advantages to the business owner. First, an LLC will protect the business owner’s personal assets (e.g., cash, investments, property, real estate, etc.) in the event that the business goes into debt or is sued. For example, should your crypto mining business go into debt then creditors can only seek payment from the LLC not your personal assets. Second, establishing an LLC provides credibility to your crypto mining business. By registering an LLC anyone can look up your business information via the office of the Secretary of State or other government agencies within the state the LLC is registered. This shows that your business operations are legitimately recognized by the state. Third, an LLC provides tax benefits. By establishing an LLC, you can avoid double taxation, file tax deductions for business expenses, and take capital expenditure deductions for equipment used to operate your business. Consult a business attorney, CPA, or tax professional to determine what type of LLC is best for the profitability of your business.

How Does Crypto Mining Tax Work?

The IRS treats cryptocurrency as a capital asset like property. This means if you were to sell your cryptocurrency for profit it will be taxed as short-term capital gains (held for less than 12 months) or as long-term capital gains (held for more than 12 months). Crypto mining is no different. If you have earned cryptocurrency through crypto mining, it is then considered income and the fair market value of the crypto on the day you earned it will be counted as part of your gross income and your regular income tax rate will apply. If you hold the crypto you’ve earned through mining, that cryptocurrency value increases and you sell it, then you would be required to pay short-term or long-term capital gains taxes on the profits.

What Should You Report to the IRS?

Depending on how you are mining crypto, either as a hobby or as a business, the way you report your crypto earnings will vary. 

If you are mining crypto as a hobby, you will be responsible for reporting to the IRS on Form 1040 Schedule 1 your crypto as “other income.”

If you are mining crypto as a business, there are several forms and tax deductions you can claim when reporting to the IRS. As a crypto mining business, you will be required to report earnings on Form 1040 Schedule C, are eligible for business deductions, and may be responsible for paying the self-employment tax if your income exceeded your business expenses for the year. Some of the eligible crypto mining business deductions you can make are equipment like hardware used to mine, the cost of repairs made to the equipment, electricity costs, hosting fees, pool fees, office expenses, and rented space like a home office or even a large data center.

Regardless of whether you are mining crypto as a hobby or a business, you should file Form 8949 and Form 1040 Schedule D. Form 8949 reconciles the amount you reported to the IRS on Form 1099-B or 1099-S. This basically is a log of the crypto you bought and sold and your capital gain or loss on each transaction. Form 1040 Schedule D essentially summarizes your capital gain and losses, including crypto.

Is Cryptocurrency Mining Still Profitable?

Cryptocurrency mining remains profitable for some individuals and businesses. When crypto mining is a hobby or a business there are several expenses such as the cost of hardware, equipment repairs, electricity cost in the area the mining takes place, electric consumption, internet connection, cooling cost of the physical location crypto mining is located, as well as other expenses. Each miner or mining business should do a cost benefit analysis to understand expenditures and potential profitability before mining.

Another consideration when evaluating the profitability of crypto mining is the value of the cryptocurrency you are mining. Due to the crypto industry’s volatility, it is rather unpredictable as to if the value of the coins you mine is worth or worth more than the cost it takes to mine it. However, to this point, some miners are taking on a HODLing strategy once they’ve mined coins. HODLing refers to a buy-and-hold strategy or, as some crypto enthusiasts refer to it as, “hold on for dear life.” Let’s say a miner earns a Bitcoin and they do not sell it right away for profit. Instead, the miner HODLs the Bitcoin because the value of the Bitcoin earned may increase over a longer period of time thus making the miner’s crypto mining activity more profitable. Additionally, as miners (or any crypto investor) HODL their cryptocurrency it creates a higher demand for the cryptocurrency, which in turn causes lower circulation and increases the value of the cryptocurrency.

Interested in Starting a Crypto Mining Business?

If you are ready to start your crypto mining business now is the time to seek legal advice to ensure you are covering all your bases to avoid risk and liability. At Blake Harris Law, our team of attorneys are experienced in the crypto industry and will assist from every legal angle of starting your crypto mining business. Contact us today via email at or via phone at 833-ASK-BLAKE.

Please note, Blake Harris Law is not a financial institution. This article is intended for education purposes only and not as tax advice.