Mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions, called the blockchain. But this is just a portion of what’s needed to complete a successful cryptocurrency transaction. Miners also need to finish validation, which involves one or more computers solving a complex mathematical problem, and hopefully getting an answer. Of course, all customers have it easier with their “mining rig”. Having a mining rig means you have dedicated computers for mining. Mining rigs often have one or more powerful graphic cards and are used for the proof of work concept. The problems to solve are very hard to calculate (cryptography). The bigger the problem is, the harder it is to solve it. In other words, your rig will be slower when you increase difficulty. So don’t expect to mine at difficulty 1 and then jump up to 4 without any downtime.
What Are Mining Pools?
A mining pool is a group of miners that join together in order to combine their hashing power, thereby getting a steady stream of Bitcoins. This allows both small and large miners to receive more frequent payouts instead of only getting paid when they solve an “algorithmic proof of work problem”.The rewards are then shared between the pool members according to their contributed mining hash power. This way, instead of waiting for months to get a return on your investment, an individual can receive small amounts of Bitcoin daily. There are numerous mining pools out there for different types of cryptocurrencies, and some pools have already closed down due to an increase in network difficulty.
Tax Implications Pre - Budget (FY 2021-2022) For Mining
Mining Income can be disclosed either as Income from Business or Income from other sources based on the type of activity. If a user is Mining as a hobby, then it is better to disclose it as Income from other sources.
On Receipt of mining rewards, Tax may become payable at applicable rates. Expenses deduction can be claimed.
However, alternative tax treatment as per Income tax judgements may be possible.
Example: Mehul received 100 ABC tokens as Mining rewards on April 01, 2021. The value of this token on exchanges is Rs.10 per ABC token.
In this case, Mehul will have Income from Mining of Rs.1,000 (100 ABC tokens * Rs.10)
Tax will be payable at Slab rates as applicable to Sunil.
However, Alternative tax treatment is also possible.
Tax Implications Post - Budget (FY 2022-2023) For Mining
Mining Income may be disclosed either as Income from Business or Income from other sources based on the type of activity. If a user is Mining as a hobby, then it may be disclosed as Income from other sources.
On Receipt of mining rewards, Tax may become payable at applicable rates. Also, expense deductions may be claimed after discussing with your tax advisor.
However, alternative tax treatment as per Income tax judgements may be possible.
Example: Sunil received 100 ABC tokens as Mining rewards on April 01, 2022. The value of this token on exchanges is Rs.10 per ABC token.
In this case, Sunil will have Income from Mining of Rs.1,000 (100 ABC tokens * Rs.10)
Tax will be payable at Slab rates as applicable to Sunil.
However, Alternative tax treatment is also possible.
Stepping In Mining - A Brief Guide
As an individual, you must look at the mining pools’ payout method and the mining pool hash rate together to determine which mining pool is the best for you. The more miners a service provider has, the greater your chance of solving a block.
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Pools with high hash rates will find more blocks, and, as a result, you will get paid more often.
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Pools with low fee percentages pay less frequently than pools with higher fees but offer greater rewards.
1. Payout method matters.
Old Bitcoin Mined Blocks – The number of blocks mined since the reward was earned. The reward for mining a block is fixed and halves every 210,000 blocks. The last halving took place in July 2016.
2. Mining Difficulty – How’s That?
If more hash power is being used by miners, then it takes longer to find a block because of increased computational power. As more hash power is added to the network, the difficulty increases. This is a measure of how difficult it is to find a new block compared to the easiest it can ever be. So if difficulty rises, it will mean less hashes will be required to mine a block and so profits will be lower than if you were mining when the difficulty was lower.
3. Mining Profitability – There are Many Factors That Affect Mining Profitability
If you are mining to make money, the first thing you need to do is calculate your cost of mining.
– If you are not mining to make money, then at least you can use this calculator to help your friends or family save money on energy costs.
