Bitcoin mining explained: how it works, the difficulty adjustment, pools and how mining income is taxed

Bitcoin has no central bank, yet new coins appear on a schedule and transactions get confirmed around the clock. The work behind both is called mining. It’s often described as solving puzzles, which is true, but it helps to know what the puzzle is for.

This guide explains what miners do, how the network keeps blocks coming at a steady pace, why most miners join pools and how mining income is taxed in the US, the UK and Canada.

What miners actually do

Miners do two jobs at once:

1. Bundle transactions into blocks. Each block adds a batch of recent transactions to the blockchain and links to the previous block.
2. Secure the chain. To add a block, a miner must show a valid proof of work: computing a value for the block’s header that falls below a target threshold set by the network.

There’s no shortcut. Bitcoin’s developer documentation explains that the lower the target, the more attempts are needed on average. Miners just try enormous numbers of possibilities until one works. Because finding a valid block takes real work, rewriting past blocks would require redoing all that work, which is what makes the record hard to tamper with.

The reward

The miner who finds a valid block earns:

• The block subsidy: newly created bitcoins. It started at 50 BTC per block and halves every 210,000 blocks. Since the April 2024 halving it has been 3.125 BTC. See the bitcoin halving explained.
• The transaction fees paid by the transactions in the block.

As the subsidy keeps halving, fees are designed to become a larger share of what miners earn.

The coinbase transaction and the 100-block wait

The reward isn’t paid by anyone: the miner claims it. Bitcoin’s developer documentation explains that the first transaction in every block must be a coinbase transaction (also called a generation transaction), which collects the block subsidy plus the fees from the block’s other transactions.

There’s a catch: the coins it creates can’t be spent for at least 100 blocks. That rule protects the network if the block turns out to be stale, beaten by a competing block, in which case its coinbase transaction disappears with it. See what is a blockchain? for how competing blocks are resolved.

The difficulty adjustment

If more miners join, blocks would be found faster; if miners leave, slower. Bitcoin corrects for this automatically. According to its developer documentation:

• Every 2,016 blocks, the network measures how long those blocks took, using their timestamps.
• The ideal is 1,209,600 seconds: two weeks, or about 10 minutes per block.
• If the blocks came faster, difficulty increases proportionally, by up to 300%. If they came slower, it decreases, by up to 75%.

That’s why bitcoin keeps producing blocks at roughly the same pace no matter how much computing power is pointed at it.

Solo vs pool mining

The developer documentation describes two approaches:

• Solo mining: you mine on your own and keep the whole reward when you find a block, but payments are large and rare. With a small share of the network’s power, you may wait a very long time.
• Pool mining: you combine your computing power with other miners. The pool finds blocks more often and shares the rewards roughly in proportion to the hashing power each member contributed. Payments are smaller but much more regular.

Modern bitcoin mining uses ASICs: specialized machines built to do this one calculation as fast as possible.

Is mining a securities activity? The SEC’s view

In its March 2026 interpretation, the SEC addressed what it calls protocol mining:

• Solo mining, using your own computing power, and mining pools, where miners combine their power to find blocks more often, don’t involve the offer and sale of securities, in the circumstances the SEC described.
• Its reasoning: miners contribute their own computational resources and are paid rewards for a service they provide to the network, not profits from someone else’s managerial efforts.
• A pool operator’s work is administrative or ministerial. Even in a pool, each miner still does the actual mining.

The interpretation is about miners contributing their own computing power. Products where you simply pay a company and wait for returns are a different matter. See is crypto a security?

Is mining worth it?

That depends on factors only you can measure:

• Hardware cost and how quickly newer machines make yours less competitive.
• Electricity price, usually the biggest running cost.
• Network difficulty, which rises as more power joins.
• The bitcoin price, which sets the value of every reward.
• Halvings, which cut the subsidy in half about every four years.

Be very wary of anyone selling “guaranteed” mining returns or cloud mining contracts with fixed profits. Real mining income goes up and down.

How mining income is taxed

United States

IRS Notice 2014-21 says that when you successfully mine virtual currency, its fair market value on the date you receive it is included in gross income. If your mining is a trade or business, and you’re not an employee, the net earnings are self-employment income, subject to self-employment tax. The IRS lists mining income among the items reported on Schedule 1 of Form 1040. The value you include in income generally becomes your basis in those coins. See US crypto tax.

United Kingdom

HMRC says whether mining is a trade depends on the degree of activity, organisation, risk and commerciality. If it isn’t a trade, the pound value of the tokens when you receive them is taxed as miscellaneous income, and related expenses can reduce the charge. If you keep the tokens and later dispose of them, you may owe Capital Gains Tax on any increase in value. See UK crypto tax.

Canada

The CRA says that in most cases, mining will be considered carrying on a business, because of the scale and resources involved. If you’re in the business of mining, the value of the crypto you receive must be included in your business income when it’s earned. The CRA also notes that equipment such as ASIC miners and GPU rigs can qualify for capital cost allowance (class 50). See Canada crypto tax.

Records to keep

For every reward: the date, the amount of crypto and its value in your currency at that time, plus your electricity bills and equipment receipts. Pool payouts can be frequent, so export your pool’s payment history regularly.

Mining and the environment

Proof-of-work mining uses large amounts of electricity, which is why it’s debated.

The US Energy Information Administration (EIA) published preliminary estimates in February 2024. It found that crypto mining probably accounts for 0.6% to 2.3% of US electricity consumption. It identified 137 mining facilities; for the 101 with capacity data, maximum electricity use totaled about 10,275 megawatts. At an estimated 80% utilization, the EIA said, that would equal the annual demand of more than three million to more than six million homes. It stressed that the figures are uncertain, because mining operations move and data are incomplete. Ethereum moved away from mining to proof of stake in 2022, and ethereum.org says that cut its energy use by about 99.95%. Bitcoin still uses proof of work. See bitcoin vs Ethereum for how the two compare.