Bitcoin Mining, Revenue and Taxes, and Why You’re Doing it Wrong

Bitcoin Mining, Revenue and Taxes, and Why You’re Doing it Wrong

If you follow crypto mining, you’ve undoubtedly seen all the forum and facebook FUD coming from miners.   Inexperienced miners get hung up on “profitability,” they look to websites like what-to-mine and turn off machines when the market price of Bitcoin goes down or seemingly becomes unprofitable.   Now, that’s a losing strategy in general, but it’s also a missed opportunity.   Before I talk about the missed opportunity, let’s talk about why it’s a losing strategy.

The ONLY (caps intentional) potential way to win the mining game is to mine/hold.   Bitcoin investing and Bitcoin mining require a leap of faith to begin with and if you’ve made this leap, you likely believe that the value of Bitcoin will increase over time and history is here to back you up in that belief.   It is true that past successes are not always a predictor of future performance, but with Bitcoin, that’s all we have to go on.    But you’re a miner, and you’ve leaped based on what you know and what you know tells you that over seven years, Bitcoin has increased in value steadily, when you correct for spikes/crashes.  There will be a saturation point when that growth slows down, but if Bitcoin continues to gain adoption…  that time is further down the road.   There are a lot of industry watchers and experts who believe that the market price of Bitcoin will hit $500k by the close of 2020.  That number seems outlandish today, but if I had told you one year ago that Bitcoin would have closed 2017 at $6k you would have thought me to be too optimistic.  In reality, though, Bitcoin closed 2017 much higher than $6k due to a buying frenzy.    Long story short, you’re not mining Bitcoin at today’s prices; you are mining Bitcoin at your cash-out price.   That price could be $20k, $100k, $500k or higher.   That price will be set by your gut and your tolerance for risk.    The most critical component of mining though is that you need to be thinking about your returns concerning cash-out price.    If that price is $100k, then you need to think about every single satoshi as being worth a portion of that $100k and not today’s price.    Now, this may sound straightforward to the savvy miner, and it should, but you’d be surprised how many miners turn their equipment off when a dip in price arrives.

You mine more Bitcoin today than tomorrow.   Difficulty adjustments are real, and you’re likely going to earn more BTC today than you will in 2 weeks.   That means that shutting your machines off will result in less BTC mined over time, and if you are thinking about Bitcoin regarding cash-out price, you’ll see how much you’re losing by turning that machine off.    Yes, electricity and facilities are expensive.  Frankly though, if you’re selling your BTC each month to pay overhead, you likely need to reevaluate your plan.   You need to have a 3-4 month buffer of overhead (in fiat) to ensure you don’t have to sell currency during a dip.   If you don’t have that, you don’t have a business… you have an expensive hobby.

Why turning your miners off during a dip is hurting you worse than you think:

Taxes.  Taxes.  Taxes.

Bitcoin miners will pay taxes on the coin they earn based not on the price at the time of sale, but on the avg. Daily market price at the time the block was mined.   It’s an accounting nightmare, but you can leverage that to your advantage.   I’d rather see clients turn their machines off when the Bitcoin price is at an ATH than when it’s in the middle of a correction.    Here’s why: Uncle Sam likes USD.   If you earn 1 BTC when the market price is $20k, you’re on the hook (roughly) for $7k of that as a tax payment (not .334 BTC).   If you earn 1 BTC when the market price is $6k, you’re only on the hook (roughly) for $2k (not .334 BTC).

That means that the smart business is in ramping up Bitcoin mining operations during a slump, not slowing them down.   If you’re not maximizing your Bitcoin mining during a dip, you’re throwing money away.  You are throwing a “tax discount coupon” in the garbage.

Planning Revenue.

It’s true that cryptocurrencies seem unpredictable, but are they really?   Kind of.   Bitcoin has enough market history that we can look back in time to figure out where we think prices will go with increased adoption.   In addition to that, Bitcoin has been around long enough that smart people are watching it and making their predictions.   Can you create a projected balance sheet for the next 12 months?   If you can’t do that, hire someone who can, or sit down and reevaluate your process.   Turning Bitcoin mining into a predictable business model is a requirement for making smart decisions with your farm and your growth.   Yes, it is imperfect, and yes, there are plenty of environmental curveballs that will be thrown at you.   But it’s the best approach you can have, and it’s better than standing naked in the middle of a battlefield.

Here’s my sales pitch (since this is what I do).  We can do this planning for you, but whether you hire us or not, hire someone to do it for you.   Running a business without a strategy and plan is no different than spending money without checking the balance in your account.   You’ll have no idea where you stand, and the anxiety it brings to your life will always leave you wondering whether you’re doing the right thing.

Bitcoin mining isn’t for everyone, you will know, or hear of, a lot of people who reach great success, and you will also know, or hear of, a lot of people who lose everything.   The difference between those two groups is a plan.   Plan the work, and work the plan.

Looking to begin or expand a crypto-mining operation?