What Is Mining Coin?
Cryptocurrency mining is how blockchain networks like Bitcoin verify transactions and release new coins into circulation. It’s a complex process that involves massive, decentralized networks of computers all over the world. In return for their computing power, miners are rewarded with fresh coins and incentivised to keep the system secure.
Blockchain technology, which powers Bitcoin and many other cryptocurrencies, creates a record of each transaction in an encrypted form. The public record is called a block, and blocks are added to the chain of previous blocks, forming a digital ledger that functions as a kind of long running receipt. Verifying these transactions and adding new blocks to the chain requires an enormous amount of computer processing power, which is why most cryptocurrencies are mined by specialised computer hardware known as miners.
The first miner to guess a solution that matches the hash value of a newly created block is able to add it to the blockchain and receives new cryptocurrency as a reward. The odds of correctly guessing a hash are adjusted every 10 minutes, to maintain a pace for creating new blocks that’s as close to one every 10 minutes as possible. Anyone with a decent home computer could have mined Bitcoin a decade ago, but the complexity of the blockchain and the need for large amounts of processing power means most mining is now carried out by specialized companies or groups of people pooling their resources.
As a result of the huge investment in mining equipment and the vast amounts of electricity needed to run it, some countries are starting to regulate or outright ban crypto mining. China is among them, with officials citing financial risks and the need to manage energy demand. This is prompting a massive migration of miners to North America, where prices are much higher and there are no government regulations preventing mining.
In addition to the cost of mining equipment, the price volatility of cryptocurrencies makes it difficult for miners to predict whether they’ll be able to turn a profit. This is especially true with Bitcoin, which has traded from less than $20,000 to nearly $69,000 in the past year.
If you’re thinking of buying mining hardware or investing in a crypto mining company, make sure you read up on the tax rules for your particular currency. You’ll need to know how the IRS treats profits from cryptocurrency trading and mining in order to plan appropriately for your future income. Check out Bankrate’s Cryptocurrency Taxes guide for more information.
If you successfully mine cryptocurrency, the fair market value of the currencies at the time you received them will be taxed as ordinary income. If you later sell the coins, you’ll be taxed at capital gains rates. You can find more tax planning guides on Bankrate, including Retirement Savings and Annuities, Charitable Remainder Unit Trusts (CRUTS) and Cryptocurrencies and Estate Planning and Cryptocurrency. And be sure to consult a professional tax advisor for advice on your specific circumstances.