Interested in getting started with hobby mining? In this guide, we’ll break down the fundamentals of running your own at-home operation — including tax implications and the best cryptocurrencies to mine!
What is hobby mining?
Hobby mining refers to the process of mining cryptocurrencies as a personal interest rather than a full-scale business operation. After setting up your mining software and hardware, you’ll be able to earn cryptocurrency rewards as passive income.
Hobby mining is meant to be accessible for the average crypto enthusiast. Typically, hobby miners set up their mining hardware within their home!
How is hobby mining taxed?
When you mine cryptocurrency as a hobby, your profits are subject to tax.
Income tax: Your mining rewards are considered income and are subject to ordinary income tax. The income that you recognize is equal to the fair market value of your cryptocurrency at the time of receipt.
Capital gains tax: When you dispose of your mining rewards in the future — such as selling it or trading it away — you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
If you need help calculating your gains, losses, and income from mining, crypto tax software like CoinLedger can help.
What’s the difference between how business and hobby miners are taxed?
Hobby miners and business miners are taxed differently. Let’s walk through a couple of key differences.
- Deductions: Business miners can deduct relevant expenses — such as equipment and electricity costs. Hobby miners are not allowed to deduct expenses.
- Self-employment tax: If you’re a solo miner, income from business mining is typically subject to self-employment taxes. Meanwhile, income from hobby mining is taxed as ordinary income.
Is my mining activity a ‘business’ or a ‘hobby’?
Remember, you do not need a formal business entity to be considered a business. The IRS looks at the multiple factors to determine whether your mining operation should be considered a ‘business’ or a ‘hobby’, including the following:
- The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
- The taxpayer puts time and effort into the activity to show they intend to make it profitable.
- The taxpayer depends on income from the activity for their livelihood.
The line between a business and a hobby mining operation can get fuzzy. If you’re not sure what category you fall into, you should reach out to a tax professional.
What do I need to mine cryptocurrency at home?
To get started mining cryptocurrency at home, you’ll need the following equipment:
- Mining Hardware: Depending on the cryptocurrency you wish to mine, you'll need either a powerful GPU (Graphics Processing Unit) or an ASIC (Application-Specific Integrated Circuit) miner. GPUs are typically cheaper and are considered a better hardware option for hobby miners. You can buy a GPU for as cheap as $300!
- Mining Software: To connect your hardware to your blockchain network, you’ll need mining software. There are many free mining software programs available for hobby miners!
- Cryptocurrency Wallet: A cryptocurrency wallet can be used to store the rewards you earn from mining operations. While there are many free software wallets available, a hardware wallet like Ledger is considered the best option for security. You can get started with a Ledger wallet for $79!
It’s also important to account for other costs — such as a cooling system for your GPU, a power supply, and electricity costs.
Can you still mine Bitcoin at home?
Generally, the more miners on a given network, the more difficult it is to earn rewards.
Because Bitcoin is the most popular cryptocurrency in the world, there are many large-scale mining operations dedicated to mining BTC. That means that it’s incredibly difficult for at-home miners to compete and operate profitably.
How can I mine cryptocurrency at home profitably?
While mining Bitcoin solo may no longer be profitable, there are methods you can use to profitably mine cryptocurrency at home:
- Mining altcoins: While Bitcoin mining is competitive, many altcoins still allow miners to earn rewards with relatively low computational power.
- Mining pools: Mining pools allow you to join forces with other miners, pool computational resources, and share rewards.
What altcoins can I mine?
Here are a few cryptocurrencies other than Bitcoin that you can consider mining.
- Monero
- Dogecoin
- Litecoin
- Ravencoin
- Ethereum Classic
- Vertcoin
What mining pools can I use?
With a crypto mining pool, you can combine your hash power with other miners around the world. This increases the odds of earning a reward — which is then distributed amongst all the miners in the pool.
While some mining pools require a certain hash power to join, most are accessible to at-home miners with a simple set-up. Here are a few popular mining pools:
Can I mine crypto on my phone?
Mobile apps like MinerGate and Crypto Miner allow users to mine cryptocurrencies on Android phones.
However, mining cryptocurrency on a smartphone is not recommended.
Mobile devices lack the computational power to compete in the mining space effectively, and you may face issues related to energy consumption.
In conclusion
While getting started with hobby mining may take time, effort, and investment, it can be a rewarding way to engage with the blockchain ecosystem. Before you get started, make sure you research your options for mining software and hardware and keep in mind potential costs and tax consequences.
Frequently asked questions
.png)
%20(1).png)
