So you want to learn how to start crypto mining, but don't know where to begin? Don’t worry, we’ve going to show you everything you need to get started in our 5 min beginners guide to crypto mining.
How to start crypto mining in 5 steps
1) Consider your location
2) Buy Computer Hardware
3) Setup a crypto wallet
4) Download mining software
5) Join a mining pool
1) Consider your location
Crypto mining is all about location, location, location. Why? Electricity. Different places have a different average price of electricity. With the price of electricity often ranging between $0.15 and $0.25 per kilowatt-hour, mining in residential areas runs too high a bill to remain consistently profitable. That’s just the truth.
Super-organised, professional crypto miners will often place their operations in regions where electricity is very cheap. Some of these include the Sichuan region in China, Iceland, the Irkutsk region in Russia, as well as some areas in the United States and Canada. These regions will usually have some form of cheap local electricity generation such as hydroelectric dams, or other renewable energy.
This doesn't mean it’s game over if you don’t have a hydroelectric dam in your garden. Amateur miners can still garner success, but they just need to be meticulous in ensuring their electric bills don’t drown their profits. To discover this, use a crypto mining calculator to check.
2) Buy computer hardware
Crypto mining requires specific hardware, often referred to as a crypto mining "rig". At the beginning of Bitcoin's history, ordinary domestic computers could be used to mine Bitcoin. Yep, that’s right. Savvy teenagers would mine Bitcoin on their school laptops. Now they're chilling on their yachts (maybe).
However, due to popularity, the complexity of Bitcoin's proof-of-work algorithm needed to increase. This is a necessity for increased computer power. No more snagging BTC on your laptop (unless it has a formidable rig attached to it and a ludicrous amount of computing power).
The specialized hardware used by most miners are called ASIC (application-specific integrated circuit) chips. These are powerful machines specifically built to solve the complex proof-of-work algorithm.
There are several calculators online on websites such as AsicMinerValue, CryptoCompare and Nicehash, where the profitability of a mining device can be quickly checked. It’s also possible to estimate profit manually with the following formula:
*INFOG SHOWING CALCULATION*
This represents your share of the overall hash rate divided by the network’s total issuance in dollars. The input values required are either fixed parameters, or they can be found on data websites like Blockchain.com.
To find the profit, you also need to subtract the cost of electricity, as discussed earlier. Thanks to the equivalence between kilowatts and kilowatt hours, this can be as simple as multiplying the device’s power usage by 24 hours in a day and the electricity price per kilowatt hour.Next, select the 'Sell' option, and enter the amount of your BTC holdings you’d like to sell. It will show you how much these holdings are worth in your chosen fiat currency.
3) Setup a crypto wallet
After you mine your first bit of crypto, you’ll need somewhere safe for it to be sent. However, be aware as some wallets warn against their users directing mining payouts to their wallet. This is because some wallets are not designed for receiving frequent tiny transactions that mining efforts in general produce. Receiving frequent mining rewards will create a lot of microtransactions that will need to be queried when you want to spend your balances.
A hardware wallet is a cryptocurrency wallet that stores the user's private keys (a critical piece of information used to authorize outgoing transactions on the blockchain network) in a super-secure physical device.
If you are considering holding onto your rewards for a long time, or are just a bit more picky about security, you may want to consider getting a hardware wallet. Some well-known hardware wallets are Ledger, Trezor and KeepKey.
4) Download crypto mining software
Your next step is to download the necessary mining software that will connect you to the blockchain.
Mining software is the software that allows solo miners to link the Blockchain to their mining hardware, and enable you to use your computing power to mine cryptocurrency. The majority of these software programs are automated and one does not need technical skills to use them. The software distributes ‘work’ to miners and adds new blocks to the blockchain. You can see a detailed report based on your earnings, ensuring you are still in profit when considering electricity bills and other expenses.
Here are some good resources for crypto mining software:
5) Join a crypto mining pool
A mining pool is a joint group of cryptocurrency miners who combine their computational resources over a network to strengthen the probability of finding a block or otherwise successfully mining for cryptocurrency.
Although some miners prefer to mine solo instead of joining a pool, pooled hashrate generally means solving blocks more consistently , leading to more frequent mining reward payouts. But as the mining market became more competitive, it became increasingly apparent that even with decent equipment, solo miners couldn’t compete.
Crypto mining pools are groups of miners who combine their hash power (computing power) to increase the chances of their group solving the proof-of-work puzzle and receiving the reward. The reward is then proportionally distributed between members of the mining pool.
Almost anyone can join a crypto mining pool, although some require that you have a certain amount of hash power to join. But if you’ve got an okay home computer setup - like a gaming PC or similar, there’s plenty of mining pools that are open to you.
Here’s how you join a mining pool:
- Choose which pool you want to join.
- Input the Stratum addresses of the pool into your mining software.
- Connect a wallet that will receive pool payouts.
- Configure your machines to the chosen pool.
Which are the best crypto mining pools?
When choosing a mining pool, you would be wise to look at these features:
Most pools require fees (a cut from your rewards), but not all of them are the same. A lower fee is good news, don’t let it be the only attribute you look at. Sometimes a low fee will reflect the power of the pool. For example, one of the most powerful pools, F2Pool has fees on the higher end of 2.5%. This doesn’t mean you shouldn't consider using it, since it has other qualities that may make the higher fee worth it.
This refers to the minimum amount you need to mine before you are paid in a 24 hour period. For example, if the minimum amount is 0.005 BTC, and today you mine 0.002BTC, you won’t get paid. But if tomorrow you mine an extra 0.003, totalling to 0.005BTC, you will receive your rewards.
Size of pool
In general, the more participants a pool has, the less time it takes to mine—pool size can equate to more or less computing time. Larger pools have a higher probability of creating blocks due to their larger computing power, while smaller ones generally take longer. A mining pool's size can also reflect its trustworthiness to some extent. For example, many active miners in a pool suggest that the pool and its management are trusted.
Another useful, but not essential feature, to keep in mind is the capacity for customer support. There’s nothing more annoying than not being able to receive adequate support when you are having problems.
If you want to discover the ideal pool for you, checkout our best crypto mining pools guide.
How to report crypto mining taxes
Crypto mining taxes are similar in most countries. In the US, you’ll pay Income Tax based on the fair market value of the coin in USD on the day you received it. This will be taxed at the same rate as your Federal and State Income Tax rates. You’ll also pay Capital Gains Tax when you later sell, spend or swap mined coins. You’ll use the fair market value of the coin on the day you received it as your cost basis.
If you are self-employed and your mining activities constitute a trade or business - your income from crypto mining will also be subject to Self-Employment Tax to cover social security and Medicare contributions. Because of this, many crypto miners choose to establish their mining operation as a business by incorporating it or setting up a sole proprietorship. This is because You can deduct your mining costs as expenses if you run your mining operation as a legit business.
Things are a tad different in the UK, whereby hobby miners and mining businesses do have slightly different tax treatment though so let’s break it down. For hobby miners, you’ll pay Income Tax based on the fair market value of your crypto in GBP at the time you receive it. You’ll also pay Capital Gains Tax when you later ‘dispose’ of your coins by selling, trading, spending or gifting them (excluding to your spouse).
You should always consult with a qualified accountant for advice on the best way to approach your mining activities from a tax perspective. For a thorough and detailed guide on crypto mining taxes for each country, see our blog.
How can Koinly help you with crypto mining taxes
If you’re a crypto miner looking for an easy way to track and report your crypto mining taxes, Koinly can help. You can sync blockchains like BTC, BCH, LTC with Koinly and automatically import all your mining transactions into Koinly.
It's crucial you keep records of your mining transactions and withdrawals so you can keep a detailed account. This makes sure you can accurately calculate your crypto gains and losses later on.
Koinly is a crypto tax tool that calculates your crypto taxes for you, meaning you don’t have to go through the hassle of doing it yourself. Once your crypto mining transactions are imported, Koinly will automatically include them in your tax summary.
As a quick breakdown, here’s a short summary of what Koinly does:
- Imports all your trades including purchases, sales, swaps, and rewards.
- Converts your transactions into your country’s currency at fair market value (this in itself is a massive time saver).
- Shows which of your transactions are taxable and which are not (you may sometimes need to do some fiddling, but for the most part the software organizes it for you).
- Allows you to submit a clean and accurate report to your tax office.