In this article, I’m going to break down today’s version of the gold rush. But it may not be the one you’re picturing. Not stagecoaches full of precious metals headed out of California. Not dusty mines or pickaxes swinging in the Wild West.
Instead, imagine a new kind of mine, one made of circuits and code, where the dirt has been replaced by data. A place where the “gold” only exists online, and the tools you use to uncover it are built with processors and power supplies. Welcome to the world of cryptocurrency mining.
If you’re a business owner wondering whether crypto mining could be a new source of income, or if you’re already mining and not quite sure how Uncle Sam views it, you’re not alone.
In this guide, I’ll walk you through what mining really is, the kind of equipment it requires, how the income is taxed, and whether you can use a self-directed retirement account to make it all more tax-efficient.
Before we get too far ahead of ourselves, just remember: we’re only scratching the surface here. Crypto is complex. Entire books have been written about this topic, and even those don’t cover everything. If you’re on board with that, let’s keep going.
Because this isn’t just a story about tech. It’s a story about taxes, income types, and how to be smarter with the way you structure your money.
And if you haven’t read my first article on crypto yet, it might be worth starting there.
Let’s go back to the beginning.
What Is Crypto Mining?
Think of mining as digital bookkeeping. Every time someone makes a transaction in a cryptocurrency like Bitcoin, that transaction has to be verified. Miners do the verifying. Or more accurately, their computers do.
When a new group of transactions, called a block, is verified, it gets added to the blockchain. As a reward for that work, the miner receives freshly created cryptocurrency.
That’s how new coins enter circulation. And that’s why the word “mining” makes sense. It’s not physical gold or silver, but the idea is the same. Miners are digging for value. They’re just doing it through data instead of dirt.
What Can Be Mined?
Bitcoin is the name that gets all the headlines. But it’s not the only coin you can mine.
Ethereum used to be a big one, until it shifted to a different model called proof of stake. But there are still plenty of mineable coins out there. Litecoin. Monero. Dogecoin. Even newer, lesser-known tokens that use less power and require simpler setups.
Each cryptocurrency has its own system for how mining works and what the rewards are. That matters, because not every coin is worth the same amount of effort. You need to weigh power usage, difficulty, and potential payout before deciding what to mine and how to do it.
How Does Mining Work?
Let’s bring it down to earth.
Imagine your computer is in a race with thousands of others. The goal? Solve a complex math puzzle. The first one to solve it gets a prize. In this case, it’s a digital coin.
The faster and more powerful your computer is, the better your odds of winning. But this isn’t something your average laptop is built for. Serious miners build entire rigs made of specialized machines. They run day and night in temperature-controlled rooms, pulling tons of electricity and generating lots of heat.
These rigs compete constantly to verify transactions and keep the network secure. For their work, they’re rewarded in crypto. It’s a nonstop process that requires technical skill, reliable power, and a real investment of time and money.
What Equipment Do You Need?
If you’re just curious, you can test mining on a basic laptop using software designed for beginners. But if you’re serious about turning mining into a business, you’ll need much more than that.
The two main hardware options are:
GPU rigs, which use high-end graphics cards similar to what gamers use. These are good for certain types of coins.
ASIC machines, which are built for one thing – mining a specific coin. They’re fast, powerful, and efficient. But they’re not flexible.
Even with the right machines, you’re not done. You’ll also need:
- A high-speed internet connection
- Cooling systems to manage heat
- A reliable electricity source, and a full understanding of your energy costs
- Secure storage for your coins, like a cold wallet not connected to the internet
Let’s be honest. This is not a plug-and-play side hustle. It’s a business. And the IRS treats it like one.
How Is Mining Income Taxed?
This is the part where most miners get caught off guard.
The IRS does not treat mining rewards like stock gains. They treat it as ordinary income the moment you receive it. If you mine one Bitcoin today and it’s worth sixty thousand dollars, that’s sixty thousand dollars in taxable income. Whether you sell the coin or not.
You must report the fair market value on the day you received the coin. And if you’re running this as a business, that income is subject to self-employment tax too.
Here’s where it gets even more fun. Let’s say you hang onto the coin and sell it later for seventy thousand dollars. Now you’ve got a ten thousand dollar capital gain. And the IRS wants tax on that, too.
So yes, you’re taxed twice. First as ordinary income when you receive the coin. Then again when you sell it, this time as a capital gain.
You’re also expected to track all of this. Dates. Values. Costs. If your bookkeeping isn’t airtight, you’re setting yourself up for a nightmare. That’s why there’s been a boom in crypto accounting software and specialized tax firms.
Is This Passive Income, Investment Income, or Ordinary Income?
Let’s clear up one of the most common misconceptions.
Crypto mining is not passive income. Not if you’re running the rigs, checking the stats, or managing the operations. That’s work. That’s a business. And the IRS sees it that way. Which means your rewards are ordinary income and likely subject to self-employment tax.
If you’re completely hands-off and your retirement account is investing passively through a third-party mining company, that might be different. But most miners I’ve spoken to are very involved. They’re watching performance, maintaining machines, and optimizing operations.
Now, what about investing income?
Well, the moment you sell a coin that you previously mined, the profit from that sale becomes a capital gain. So technically, the same coin is taxed two ways at two different times. Ordinary income when mined. Capital gains when sold.
This dual classification is why tax planning in the crypto space is so important. And it’s also why the structure of your business matters.
Can You Use a Self-Directed Retirement Account to Mine Crypto?
Here’s where things get tricky.
Yes, you can use a Self-Directed IRA or Solo 401(k) to invest in mining, but only if you follow the rules very carefully.
Tax Strategist Pro Tip: Before we go any further, I can already hear the peanut gallery revving up. Probably mid-eye-roll, maybe even chucking a beer can in my direction. Fair enough. You have every right to question this.
But let me make my position clear. Yes, mining inside a retirement account is technically possible. That’s not up for debate.
Still, here’s my personal (and admittedly biased) take: unless you’re prepared to get deep into the weeds on what’s allowed – and more importantly, what’s not – I strongly recommend keeping your retirement funds out of the mining game. And here’s why.
Some folks will tell you to take retirement funds, form an LLC, buy mining equipment through that LLC, and start mining right away. On paper, it sounds doable. But in practice, it opens the door to some serious tax landmines.
For starters, mining inside an IRA or Solo 401(k) can trigger something called UBIT, or Unrelated Business Income Tax. UBIT applies when a tax-exempt retirement account earns income from an active business (like mining crypto) instead of passive investments. That means your IRA could end up with its own tax bill, which most people don’t see coming.
Now, there is a workaround. You can set up a “blocker” C-Corp that acts as a buffer between the retirement account and the business activity. That structure can help minimize or avoid UBIT. But it’s not simple, and the setup must be airtight. It also adds additional compliance expenses and precious time to the mix.
Even then, the biggest danger isn’t UBIT. It’s the risk of self-dealing.
One client of mine used his IRA funded mining equipment in his home office. The moment that equipment entered his personal space, the IRS considered it a prohibited transaction. That one mistake disqualified the entire IRA. Years of tax-deferred growth… gone.
The rules in this space are strict, and they don’t leave room for interpretation. This is why I usually advise clients to consider mining as part of their active wealth-building strategy, outside of retirement accounts. There are just too many traps in this area, and one wrong move can unravel the entire structure.
Moving On: To reiterate – when you want to use your retirement accounts to fund your mining operation you cannot use your own equipment. You cannot perform services for the mining operation. You cannot have any personal involvement in the day-to-day activities.
Why? Because doing any of that would trigger a prohibited transaction. And that could disqualify your entire retirement account.
To stay compliant, your retirement plan must invest passively through a third-party mining company or entity. It has to be completely arm’s-length. No personal touch. No oversight. No shared resources.
It’s absolutely doable. But you need to know what you’re doing, and you need to work with professionals who understand both crypto and retirement plan rules. One wrong move can ruin the tax advantages of your entire plan.
A Real Story: How One Miner Lost $150,000
A client came to us in a panic.
He had mined about three hundred thousand dollars worth of Ethereum in 2021. He held onto it. Never sold. Thought he was being smart.
Then the market dropped.
When tax time came, his coins were worth less than half. But the IRS didn’t care about what they were worth now. They cared about what they were worth then. Which meant he owed taxes on the full three hundred thousand dollars of income. Despite the fact he had never cashed out.
That tax bill? Nearly six figures.
This is why planning is everything. You can’t rely on luck. You need a strategy that accounts for volatility, liquidity, and tax timing.
A Smarter Way Forward
Crypto mining can absolutely be profitable. But it can also be a tax trap.
The good news is, there are smarter ways to mine. Structuring through an LLC, tracking your expenses correctly, or investing passively through a separate entity can open the door to major tax savings. You can even layer this with other asset protection strategies to shield your crypto from legal and financial risk.
The key is getting the structure right from the start. That means working with someone who understands not just crypto, but the tax code, business formation, and long-term planning.
One more note. Setting up a company to run your mining operation doesn’t just help with taxes. It also keeps those assets out of your personal name. And in recent years, we’ve seen too many crypto investors lose their wealth simply because they had no asset protection in place. We’ll explore that more in another article.
If you’re mining now or thinking about starting, the smartest move is to meet with a tax strategist who understands this space. Not just someone who dabbles in crypto. Someone who knows how to protect it, grow it, and keep the IRS from knocking at your door.
Welcome to the New Age of Accounting. Let’s begin.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
