How is it legal to award miners with coins made out of nothing? I understand that block rewards are made out of nothing but say a miner wants to cash out on all of their bitcoins... this will lead them to obtain, let us say, the USD equivalent of all the bitcoins the miner has from transactions + whatever the miner earns as block rewards. 

So what this is doing is giving the miner all the USD they legally own and also some extra money that they generated from their block rewards. How is this legal because no entity is paying the miner and the miner is technically making money out of thin air?

I know this is kind of a complicated query but I do not understand how it is okay to make money out of thin air like that.
Miners spend energy to create blocks/getting rewarded bitcoin, it's not out of thin air. As new miners try to create new blocks and get the block rewards, the energy needed to create a new block increases and it gets harder and harder to create a new valid block. This difficulty is adjusted every two weeks. For example, at the start of the year the difficulty was 5,618,595,848,853 and now is 12,876,842,089,682, which means it costs more than double to create a bitcoin now than at the start of the year. If you try to mine bitcoin with your laptop/desktop/smartphone you will get less bitcoin for the electricity that you spent than you would get if you bought it at an exchange.

The cost of creating one bitcoin with an electricity cost of $0.05/Kwh, for this era, is apr. given by:

Cost($/BTC) = difficulty[trillion] * energy_efficiency[J/Gh] * 4772


So, for an antminer S9, the current cost would be about $6144 per bitcoin.

Also keep in mind that the cost of mining bitcoin doubles every four years (halvening event).

Some resources you might want to check:


Bitcoin difficulty - https://btc.com/stats/diff
Energy efficiency of mining equipment (ASICs) - https://www.cbeci.org/methodology/