What Is an Application-Specific Integrated Circuit (ASIC) Miner?

An application-specific integrated circuit (ASIC) is an integrated circuit chip designed for a specific purpose. An ASIC miner is a computerized device that uses ASICs for the sole purpose of “mining” digital currency. Generally, each ASIC miner is constructed to mine a specific digital currency. So, a Bitcoin ASIC miner can mine only bitcoin. One way to think about bitcoin ASICs is as specialized bitcoin mining computers optimized to solve the mining algorithm.

Developing and manufacturing ASICs as mining devices is costly and complex. However, because ASICs are built especially for mining cryptocurrency, they do the job faster than less powerful computers. As a result, ASIC chips for cryptocurrency mining have become increasingly efficient, with the latest generation hashing at 158 terahashes per second but only using 34.5 joules per terahash.

Understanding Application-Specific Integrated Circuit (ASIC) Miners

Instead of being general-purpose integrated circuits—like RAM chips or PC or mobile device microprocessors—ASICs employed in cryptocurrency mining are specific integrated circuits designed solely to mine cryptocurrencies.

Initially, Bitcoin’s creator(s) intended for bitcoin to be mined on central processing units (CPUs) of commonly used laptops or desktop computers. However, Bitcoin ASICs surpassed both CPUs and graphics processing units (GPUs) because of their reduced electricity consumption and greater computing capacity. After gaining traction in mid-2013, when other hardware mining devices started hitting bottlenecks in their mining, Bitcoin ASIC miners increased and retained their lead.

A hash is a long hexadecimal number used to identify blocks in a blockchain, called the block header hash or block hash. To mine a block, miners begin adding values to a hash to generate new ones until a number less than the target difficulty (original hash) is reached. This is called hashing. The more hashes that can be performed in a set period, the more likely a miner is to earn bitcoin. ASIC miners are optimized to compute hash functions efficiently and quickly.

Although mining cryptocurrencies can be an expensive proposition of declining profitability, many people are drawn to it. Despite the uncertain return on investment, would-be cryptocurrency miners are willing to incur high upfront expenses for pricey ASICs and pay significant ongoing costs for electricity in return for the prospect of earning cryptocurrency.

Development of the ASIC Miner

Cryptocurrency mining is required by a proof of work (PoW) blockchain like Bitcoin to carry out its operations. The mining process involves solving a block’s hash by randomly generating numbers until reaching a number below the target difficulty number. The first miner to find the solution to the puzzle closes the block. Each winner in the bitcoin mining competition receives a reward (a specific amount of bitcoin) along with the transaction fees for the transactions in that block.

In Bitcoin’s early days, any computer with adequate processing power could mine bitcoin. However, those days are long gone; bitcoin’s soaring popularity and growing acceptance have attracted hordes of crypto miners.

At the same time, cryptocurrency mining has become exponentially more difficult because the mining difficulty changes as miners enter and exit the network. Over time, the number of miners has constantly grown, which increased the difficulty. These developments have resulted in a race to harness the most “hashing power,” the term used to describe how many hashes per second a miner can generate (or the combined hashes per second of a networked mining rig or pool). ASIC miners came about as a result of this quest for more hashing power; modern Bitcoin ASICs can hash at more than 150 terahashes per second (nine zeros, or 150 x 10¹² hashes per second).

ASIC devices were popularized by Bitmain (headquartered in China), which dominates ASIC Bitcoin mining activities through its Antminer ASIC product range.

ASIC Miner Advantages

Though GPU and CPU mining rigs rely on components that have more than one function, ASIC miners are designed for the sole purpose of mining cryptocurrency. This singular focus makes an ASIC miner much more powerful and energy-efficient than a comparable GPU miner.

Because each cryptocurrency has its own cryptographic hash algorithm, an ASIC miner is designed to mine using that specific algorithm. For example, Bitcoin ASIC miners are designed to hash the SHA-256 algorithm, while Litecoin (LTC) uses scrypt (pronounced es-crypt). Though this means that an ASIC miner could technically mine any other cryptocurrency based on the same algorithm, most miners who invest in ASIC hardware designed to mine bitcoin or Litecoin stick to mining that specific cryptocurrency.

ASIC Miner Considerations

Before investing thousands of dollars in an ASIC mining rig, here are some factors to be considered:

• What coins can be mined? The list of cryptocurrencies that can be mined with ASICs is far smaller than those that can be mined with a GPU rig. Cryptocurrencies that can be mined with ASICs include Bitcoin, Litecoin, and several others.
• Rig location: Though GPU mining rigs can be located in one’s home, ASIC miners are louder and generate much more heat. This means that one’s home is not ideal for an ASIC miner, and alternate locations like a basement or garage with cooling need to be considered.
• Power consumption: The latest generation of ASIC machines are more energy-efficient than GPU rigs but consume tremendous power nevertheless. An ASIC miner based in one’s home may necessitate upgrading the electrical wiring system to handle the increased power load.
• Choosing a Bitcoin mining pool: Mining pools enable miners to combine the power of their ASIC miner rigs to mine bitcoin and share the rewards for successfully minted blocks. Factors to be considered when choosing a pool include its reputation, size, and payment rules.
• Return on Investment: Is the return on investment sufficiently high enough to justify the upfront cost of an ASIC miner and ongoing operating expenses?

What Is an Atomic Swap?

An atomic swap is an exchange of cryptocurrencies from separate blockchains. The swap is conducted between two entities without a third party’s involvement. The idea is to remove centralized intermediaries like regulated exchanges and give token owners total control.

The term atomic derives from the term “atomic state” in which a state has no substates; it either happens or it doesn’t—there is no other alternative. This refers to the state of the cryptocurrency transaction; it happens or it doesn’t.

Most atomic swap-enabled wallets and blockchains use smart contracts. Smart contracts are programs within blockchains that execute when certain conditions are met. In this case, the conditions are that each party agrees to the transaction before a timer runs out. Using a smart contract in the trade prevents either party from stealing a cryptocurrency from the other.

Atomic swaps are also called cross-chain atomic swaps.

Understanding Atomic Swaps

Each cryptocurrency is supported by a blockchain, designed only to accept transactions in specific tokens. For example, Bitcoin (BTC) has a blockchain, and ETH (ether) has another. You cannot easily exchange BTC and ETH without first converting to fiat currency then buying the other; another technique is to convert between cryptocurrencies and exchanges multiple times to get the one you want. Atomic swaps allow you to exchange tokens from different blockchains in one trade.

Decentralized exchanges can conduct atomic swaps for you. A decentralized exchange (DEX) has no central authority regulating it; it is a platform you can trade on without third parties. You can also choose from cross-chain swap providers, where you transfer your digital assets into another wallet, conduct the swap, and transfer them back out.

History of Atomic Swaps

The concept was conceived shortly after altcoins—cryptocurrencies other than Bitcoin—materialized. The creation of altcoins meant some cryptocurrency owners became interested in moving capital between coins. This type of token swap first appeared in September 2017, when an atomic swap between Decred and Litecoin was conducted.

Since then, startups and decentralized exchanges have implemented swaps and allowed users the same facility. For example, Lightning Labs, a startup that uses Bitcoin’s lightning network for transactions, has conducted off-chain swaps utilizing the technology.

Special cryptocurrency wallets have also been developed that are capable of cross-chain atomic swaps—Liquality has developed a wallet that will swap Bitcoin, ETH, and more.

Atomic Swap Process

In an atomic swap, two token owners agree to exchange their tokens for any amount they agree on. The smart contract program sees that they both agreed to it, so it executes the trade for them. The transaction is recorded in the blockchain and validated by the network nodes, and then a new block is opened for another transaction.

The transaction cannot be reversed. Both parties must agree to another transaction to exchange the tokens again if they would like them back.

Atomic swaps use Hash Timelock Contracts (HTLC) to automate the exchange of tokens. As its name denotes, HTLC is a time-bound smart contract between parties that involves generating one cryptographic hash on each end.

HTLC requires both parties to acknowledge receipt of funds within a specified timeframe. If one party fails to confirm the transaction within the timeframe, then the entire transaction is voided, and funds are returned. This eliminates counterparty risk, or the risk that one party will accept the offered coins and decline the transfer of their coins.

For instance, suppose Jane wants to convert 1 BTC to an equivalent number of Litecoins with John. She submits the transaction through an atomic swap-capable wallet. A cryptographic hash function generates a hex number to encrypt the transaction during this process. The process is repeated at John’s end.

Both Jane and John unlock their respective funds using their encrypted numbers. They have to do this within a specified timeframe, or the transfer will not occur. The HTLC within the blockchains then executes the trade.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

What Is a 501(c)(3) Organization?

Section 501(c)(3) is a portion of the U.S. Internal Revenue Code (IRC) and a specific tax category for nonprofit organizations. Organizations that meet Section 501(c)(3) requirements are exempt from federal income tax. While the Internal Revenue Service (IRS) recognizes more than 30 types of nonprofit organizations, only those that qualify for 501(c)(3) status can say that donations to them are tax deductible.

Most of the organizations that may be eligible for 501(c)(3) designation fall into one of three categories: charitable organizations, churches and religious organizations, and private foundations. The rules outlined in Section 501(c)(3) are regulated by the U.S. Treasury through the IRS.

How a 501(c)(3) Organization Works

To be considered a charitable organization by the IRS, a group must operate exclusively for one of these purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals.

Furthermore, the IRS defines “charitable” activities as “relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

Requirements of a 501(c)(3) Organization

To be tax exempt under Section 501(c)(3), an organization must not be serving any private interests, including the interests of the creator, the creator’s family, shareholders of the organization, other designated individuals, or other persons controlled by private interests. None of the net earnings of the organization can be used to benefit any private shareholder or individual; all earnings must be used solely for the advancement of its charitable cause.

A 501(c)(3) organization is also forbidden from using its activities to influence legislation in a substantial way, including participating in any campaign activities to support or deny any particular political candidate. It is typically not permitted to engage in lobbying (except in instances when its expenditures are below a certain amount).

People employed by the organization must be paid “reasonable compensation,” which is based on the fair market value that the job function requires.

To remain tax exempt under Section 501(c)(3), an organization is also required to remain true to its founding purpose. If an organization has previously reported to the IRS that its mission is to help less privileged individuals gain access to a college education, it must maintain this purpose. If it decides to engage in another calling—for example, sending relief to displaced families in poverty-stricken countries—the 501(c)(3) organization has to first notify the IRS of its change of operations to prevent the loss of its tax-exempt status.

While some unrelated business income is allowed for a 501(c)(3) organization, the tax-exempt charity may not receive substantial income from unrelated business operations. This means that the majority of the firm’s efforts must go toward its exempt purpose as a nonprofit organization. Any unrelated business from sales of merchandise or rental properties must be limited or the organization could lose its 501(c)(3) status. While the IRS doesn’t specify exactly how much is too much unrelated business income, the law firm of Hurwit & Associates, which specializes in representing nonprofits, estimates the amount at somewhere between 15% and 30%.

While organizations that meet the requirements of Section 501(c)(3) are exempt from federal income tax, they are required to withhold federal income tax from their employees’ paychecks and pay Social Security and Medicare taxes. They do not, however, have to pay federal unemployment taxes.

Special Considerations

Organizations that meet the 501(c)(3) tax category requirements can be classified into two categories: public charities and private foundations. The main distinction between these two categories is how they get their financial support. 

Public Charity

A public charity is a nonprofit organization that receives a substantial portion of its income or revenue from the general public or the government. At least one-third of its income must be received from the donations of the general public (including individuals, corporations, and other nonprofit organizations).

If an individual donates to an organization that the IRS considers to be a public charity, they may qualify for certain tax deductions that can help them lower their taxable income. Generally, the total amount of donations to a tax-exempt public charity that an individual can claim is limited to 50% of their adjusted gross income (AGI). However, there is no limitation on donations to qualified charitable organizations, such as a 501(c)(3).

Private Foundation

A private foundation is typically held by an individual, a family, or a corporation and obtains most of its income from a small group of donors. Private foundations are subject to stricter rules and regulations than public charities. All 501(c)(3) organizations are automatically classified as private foundations unless they can prove they meet the IRS standards to be considered a public charity. The deductibility of contributions to a private foundation is more limited than donations for a public charity.

To apply for tax-exempt status under Section 501(c)(3), most nonprofit organizations are required to file Form 1023 or Form 1023-EZ within 27 months from their date of incorporation. The charitable organization must include its articles of incorporation and provide documents that prove that the organization is only operating for exempt purposes.

However, not all organizations that qualify for the tax category need to submit Form 1023. For example, public charities that earn less than $5,000 in revenue per year are exempt from filing this form. Even though it is not required, they may still choose to file the form to ensure that donations made to their organization will be tax deductible for donors.

Advantages and Disadvantages of a 501(c)(3) Organization

The 501(c)(3) status offers a myriad of benefits to the designated organizations and the people they serve. For starters, 501(c)(3) organizations are exempt from paying federal income and unemployment taxes, and patrons who donate to them are allowed to claim a tax deduction for their contributions.

To help with funding and further their mission, these organizations are eligible to receive government and private grants. To qualify, the organization must have a mission aligned with the purpose of the grant and a need for it. In addition, 501(c)(3) organizations often receive discounts from retailers, free advertising by way of public service announcements, and food and supplies from other nonprofit organizations designed to help in times of need.

A 501(c)(3) could be the lifelong dream of its founder; however, once established as a 501(c)(3), it no longer belongs to its founder. Rather, it is a mission-oriented organization belonging to the public. To maintain its favorable tax treatment, it must operate within the confines of the law pertaining to 501(c)(3) organizations.

Because the organization serves the public, it must operate with full transparency. Therefore, its finances, including salaries, are available to members of the public and subject to their review.

Example of a 501(c)(3) Organization

The American Red Cross, established in 1881 and congressionally chartered in 1900, is one of the United States’ oldest nonprofit organizations. Its mission statement says that the Red Cross “prevents and alleviates human suffering in the face of emergencies by mobilizing the power of volunteers and the generosity of donors.” Since its inception, its goal has been to serve members of the armed forces and provide aid during disasters.

Located in 191 countries, the Red Cross operates the largest network of volunteers in the world. This 501(c)(3) organization is segmented into three divisions: the National Red Cross and Red Crescent Societies, the International Federation of Red Cross and Red Crescent Societies, and the International Committee of the Red Cross.

The National Red Cross and Red Crescent Societies, which include the American Red Cross, aim to relieve human suffering globally by empowering subordinate organizations to operate within their nation’s borders to provide disaster relief, education, and other related services. The International Federation of Red Cross and Red Crescent Societies provides global humanitarian aid during peacetime, such as assisting refugees. The International Committee of the Red Cross provides humanitarian relief for people affected by war or other armed conflicts.

People who itemize their tax deductions can contribute to the Red Cross and claim the amount donated as a deduction. Taxpayers who use the standard deduction may still claim up to $600 of their 501(c)(3) contributions as a tax deduction in 2021.

The Bottom Line

501(c)(3) organizations are nonprofit groups with a dedicated mission. Most people are familiar with them as churches and charities, but they also include private foundations. As long as they operate to support their mission, they receive favorable tax treatment, such as avoiding federal income and unemployment taxes.

What Is the 83(b) Election?

The 83(b) election is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting.

Understanding the 83(b) Election

The 83(b) election applies to equity that is subject to vesting, and it alerts the Internal Revenue Service (IRS) to tax the elector for the ownership at the time of granting, rather than at the time of stock vesting.

The 83(b) election documents must be sent to the IRS within 30 days after the issuing of restricted shares. In addition to notifying the IRS of the election, the recipient of the equity must also submit a copy of the completed election form to their employer.

In effect, an 83(b) election means that you pre-pay your tax liability on a low valuation, assuming the equity value increases in the following years. However, if the value of the company instead declines consistently and continuously, this tax strategy would ultimately mean that you overpaid in taxes by pre-paying on higher equity valuation.

Typically, when a founder or employee receives compensation of equity in a company, the stake is subject to income tax according to its value. The fair market value of the equity at the time of the granting or transfer is the basis for the assessment of tax liability. The tax due must be paid in the actual year the stock is issued or transferred.

However, in many cases, the individual receives equity vesting over several years. Employees may earn company shares as they remain employed over time. In which case, the tax on the equity value is due at the time of vesting. If the company’s value grows over the vesting period, the tax paid during each vested year will also rise in accordance.

Example of an 83(b) Election

For example, a co-founder of a company is granted 1 million shares subject to vesting and valued at $0.001 at the time the shares are granted. At this time, the shares are worth the par value of $0.001 x number of shares, or $1,000, which the co-founder pays. The shares represent a 10% ownership of the firm for the co-founder and will be vested over a period of five years, which means that they will receive 200,000 shares every year for five years. In each of the five vested years, they will have to pay tax on the fair market value of the 200,000 shares vested. 

If the total value of the company’s equity increases to $100,000, then the co-founder’s 10% value increases to $10,000 from $1,000. The co-founder’s tax liability for year 1 will be deduced from ($10,000 – $1,000) x 20% i.e. in effect, ($100,000 – $10,000) x 10% x 20% = $1,800.

• $100,000 is the Year 1 value of the firm
• $10,000 is the value of the firm at inception or the book value
• 10% is the ownership stake of the co-founder
• 20% represents the 5-year vesting period for the co-founder’s 1 million shares (200,000 shares/1 million shares)

If, in year 2, the stock value increases further to $500,000, then the co-founder’s taxes will be ($500,000 – $10,000) x 10% x 20% = $9,800. By year 3, the value goes up to $1 million and the tax liability will be assessed from ($1 million – $10,000) x 10% x 20% = $19,800. Of course, if the total value of equity keeps climbing in Year 4 and Year 5, the co-founder’s additional taxable income will also increase for each of the years.

If at a later time, all the shares sell for a profit, the co-founder will be subject to a capital gains tax on his gain from the proceeds of the sale.

83(b) Election Tax Strategy

The 83(b) election gives the co-founder the option to pay taxes on the equity upfront before the vesting period starts. This tax strategy will only require that tax be paid on the book value of $1,000. The 83(b) election notifies the IRS that the elector has opted to report the difference between the amount paid for the stock and the fair market value of the stock as taxable income. The share value during the 5-year vesting period will not matter as the co-founder won’t pay any additional tax and gets to retain the vested shares. However, if the shares for sold for a profit, a capital gains tax will be applied. 

Following our example above, if the co-founder makes an 83(b) election to pay tax on the value of the stock upon issuance, the tax assessment will be made on $1,000 only. If the stock is sold after, say, ten years for $250,000, the taxable capital gain will be on $249,000 ($250,000 – $1,000 = $249,000).

The 83(b) election makes the most sense when the elector is sure that the value of the shares is going to increase over the coming years. Also, if the amount of income reported is small at the time of granting, an 83(b) election might be beneficial.

In a reverse scenario where the 83(b) election was triggered, and the equity value falls or the company files for bankruptcy, then the taxpayer overpaid in taxes for shares with a lesser or worthless amount. Unfortunately, the IRS does not allow an overpayment claim of taxes under the 83(b) election. For example, consider an employee whose total tax liability upfront after filing for an 83(b) election is $50,000. Since the vested stock proceeds to decline over a 4-year vesting period, they would have been better off without the 83(b) election, paying an annual tax on the reduced value of the vested equity for each of the four years, assuming the decline is significant.

Another instance where an 83(b) election would turn out to be a disadvantage will be if the employee leaves the firm before the vesting period is over. In this case, they would have paid taxes on shares that would never be received. Also, if the amount of reported income is substantial at the time of stock granting, filing for an 83(b) election will not make much sense.