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Some cryptocurrencies are created through a process called “mining.” We explain how it works—and whether it’s taxable in Canada.
Crypto mining is used by certain cryptocurrencies, including bitcoin, for multiple purposes: generating (or minting) new coins, validating transactions on the blockchain (a distributed digital ledger) and monitoring the ownership of coins.
Crypto mining is a competitive process. High-powered computers—built especially for mining—compete to solve complex math problems, and whichever solves it first earns the crypto as a reward. In the early days of crypto, individuals mined coins using a computer like the one you have at home. But these days, mining operations are sophisticated ventures, with warehouses full of “mining rigs,” working away, and the math problems are much harder to solve. (Crypto mining is often criticized for using enormous amounts of electricity.)
Why was crypto mining created, and why would crypto be given away for solving math problems? Legal tender, or fiat money, like the Canadian dollar, is considered legitimate because centralized authorities—like governments and central banks—validate it. Cryptocurrencies like bitcoin gain credibility due to the rigor of the mining process.
If you start mining cryptocurrency, keep detailed records of your activities—your earnings may have tax implications.
Example: “Rami has invested in a specialized computer to mine and earn bitcoin, whereas many of his friends have bought theirs as investments through a crypto exchange.”
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