What are Australian tax issues for cryptocurrency mining?

| Cryptocurrency, Investing
What are Australian tax issues for cryptocurrency mining? | Munro's Accountants and Advisors

The content in this article is provided for general information purposes and is not tax, legal, investment or other professional advice. Readers should seek appropriate professional advice prior to making any decision.

As explained on our Mining page, there are a number of factors to consider in determining the taxation treatment of cryptocurrency mining and forging. This article briefly outlines the core issues for five of the most popular situations:

  • At home proof of work mining
  • At home proof of stake forging
  • Commercial mining
  • Cloud mining contracts
  • Leasing (sale of hashing power on a marketplace)

At home proof of work mining

This situation refers to someone (let’s call him Greg) who owns and operates one or a handful of proof of work mining rigs from his home. Greg is passionate about cryptocurrency and enjoys participating in this new technology by mining, and it is his intention to accumulate the mined coins for long-term investing. He points his mining rigs to a pool which pays out using the Pay Per Last N Share reward system. Expenses incurred are funded from Greg’s salary income.

We classify Greg as a hobby miner. What this means for Greg is that he needs to keep a record of cryptocurrency mined. He also needs to keep records of associated expenses (e.g. hardware costs, electricity). These expenses are allocated against cryptocurrency mined, which becomes the cost of the cryptocurrency. Upon receipt of the mined cryptocurrency, a small portion is typically assessable income and the other larger portion does not have immediate tax implications. When Greg later disposes of the cryptocurrency, he either makes a gain or a loss, depending on whether the proceeds from disposal are worth more than the cost of mining the coin. If Greg mined the cryptocurrency more than 12 months ago, he might pay tax on only 50% of the gain.

Greg should speak with a cryptocurrency specialist accountant ideally before commencing mining, or soon thereafter, in order to fully appreciate his record keeping requirements and consider structuring options which may later save him significant tax.

At home proof of stake forging

Here a person (let’s call her Alice), stakes her cryptocurrency and operates a node validating blockchain transactions and verifying blocks. In return, the proof of stake system rewards Alice with cryptocurrency. Alice does this as a means to accumulate more coins which she adds to her investment portfolio. Alice already owned equipment to operate the node and there are very little expenses, which are paid from Alice’s salary income.

We classify Alice as a hobby forger. The same outcome applies to Alice as it did for Greg above.

Commercial mining

This covers the situation where a company operates a large scale cryptocurrency mining business out of a data center. The company mines cryptocurrency and sells the cryptocurrency to cover ongoing expenses, reinvest into further mining rigs and pay out profits to shareholders. This company is a commercial miner carrying on business.

The sale of cryptocurrency is business income, recorded as a disposal of trading stock. The classification of sales for GST purposes depends to who the cryptocurrency is sold. This then influences to what extent, if any, GST can be claimed back on expenses. The company needs to maintain records of cryptocurrency mined and sold, and associated expenses. It is also important to record cryptocurrency held at the end of the financial year.

Taxation of profits arising from commercial mining depends on the business structure. It is wise to establish a tax effective structure prior to commencement, as this can save many thousands of dollars. If a commercial miner intends to hold some cryptocurrency for long-term investing, then they need to take certain steps to access the 50% CGT discount, otherwise, tax may be payable on the whole gain, even if the cryptocurrency is held for many years.

Cloud mining contracts

This refers to the situation where someone (let’s call him Roger) purchases a 12-month cloud mining contract. This means that instead of Roger owning and operating his own mining hardware, he effectively buys a share of mining power from the cloud mining supplier. Under this arrangement, Roger is entitled to the cryptocurrency earned from his share of mining power, less pool fees, during the 12-month contract term. The mining power is pointed to a pool with cryptocurrency paid out using the Pay Per Share reward system. Roger then intends to hold the cryptocurrency for long-term investing.

Roger is classified as a hobby miner. Expenses associated with this, such as the contract fee, are deductible against income. The cryptocurrency earned from his cloud mining contracts does give rise to assessable income and is equal to the value of the cryptocurrency received at the time it is paid. This becomes the cost of the cryptocurrency going forward. When Roger later disposes of the coins, he makes a gain or loss. If he owned the coin for more than 12 months, then he might pay tax on only 50% of the gain.

We believe it is in Roger’s best interest to speak with our cryptocurrency specialist accountants as we can review the situation and provide tax planning options to help mitigate tax.

Leasing

We refer to the situation where someone (let’s call her Liz) owns a handful of mining rigs and rents the hash power to buyers via a marketplace. Liz points her mining power to the marketplace and someone buys the hashing power. In return, Liz receives payment in cryptocurrency from the buyer, and the buyer earns the cryptocurrency mined during the period of lease. Liz sells the cryptocurrency as soon as possible.

The cryptocurrency received by Liz is assessable income, whilst expenses associated with this are deductible against income. Subsequent disposal of cryptocurrency results in an assessable profit or a deductible loss. Depending on the scale of the operation, Liz may need to consider GST implications. Liz should be engaging a specialist cryptocurrency accountant to formulate a strategy to save tax and understand recordkeeping requirements.

This article has provided an overview of common cryptocurrency mining and forging scenarios; however, there are many factors to consider and your situation may result in a different outcome. If you would like to know more and obtain tailored tax advice, then we encourage you to speak with one of our cryptocurrency specialists. Jump on the phone and give us a call.