Cryptocurrency miners and forgers, thank you for your service

You’ve entered the exciting world of earning cryptocurrency from mining or forging by helping secure the blockchain – what does that mean for you come tax time?

Where to begin? What a minefield!

Cryptocurrency mining and forging is a bit like the gold rush in the wild west. It seems everyone wants to get involved and make a lot of crypto. The trouble for us accountants… there’s just so many different variants of mining and forging! Lucky for you, we’re pioneers in this space and can help clarify the tax treatment. 

Hobby vs Commercial Operations

The first place to start is to determine whether you’re a hobby miner or a commercial miner.

  • Hobby Miner

    A hobby miner or forger is someone who participates in cryptocurrency mining/forging as an enjoyable pastime not in a business-like manner seeking commercial profits. Their investment in mining equipment will be relatively insignificant - a small scale operation typically at home - and intention to accumulate the rewarded coins rather than sell immediately to turn a profit.

    If you’re a hobby miner or forger, then broadly speaking this is how you’re taxed:

    • Rewarded coins are not income but rather a capital acquisition
    • Cost of equipment is allocated as a cost of acquisition of the rewarded coins
    • Running costs are also allocated as a cost of acquisition of the rewarded coins
    • On disposal of the rewarded coins, gains are 100% taxable if within 12 months of being acquired, otherwise 50% taxable where held for more than 12 months.
  • Commercial Miner

    A person conducting their mining/forging in a large scale business operation is a commercial miner/forger. If you’ve purchased many thousand dollars of equipment and operating out of a dedicated premise such as a data centre, then you’re in the business of mining/forging. You may also be in the business of mining/forging if rather than accumulating the rewarded coins, you continually sell for an immediate profit. Tax law is full of grey areas and there is no hard line as to when someone crosses over from hobby to commercial mining/forging.

    If you’re a commercial miner or forger, then broadly speaking this is how you’re taxed:

    • Sale of rewarded coins is business income
    • Cost of equipment is a tax deduction in accordance with depreciation rules
    • Running costs are a tax deduction offset against income
    • End of year trading stock rules apply
    • Profit is 100% assessable and losses 100% deductible (subject to passing non commercial loss rules)
    • You will likely have GST compliance obligations

    For a more detailed explanation see:

    What are Australian tax issues for cryptocurrency mining?

It’s Not that Simple

Unfortunately, tax is rarely simple and in the case of mining/forging, it’s anything but. We also have to look further into your operations and consider things like:

  • Proof of Work vs Proof of Stake vs Proof of Service vs Proof of Holding

    The verifying and validating system utilized by a blockchain can influence the tax treatment. How so? Well because each system requires a different level of input by the miner/forger which can influence whether or not you are a hobby or commercial operator. Very broadly, this is the more likely category:

    • Proof of Work – Commercial
    • Proof of Stake - Hobby
    • Proof of Service (e.g. Masternode) – Commercial
    • Proof of Holding - Hobby
  • Solo vs Pool vs Leasing Hardware Mining vs Cloud Mining Contracts

    Wow; who knew there were so many ways to mine cryptocurrency and more importantly that it can effect your tax liability. Yep, we need to look into whether you are solo mining, pool mining with your own hardware, leasing your hashing power or have a cloud mining contract.

  • PPS vs PPLNS

    Even the pool reward payout system can influence the tax treatment. The most popular schemes we’ve come across are Pay Per Share ("PPS") and Pay Per Last N Shares ("PPLNS"). Payouts from PPS pools are usually 100% assessable income and payouts from PPLNS pools a combination of assessable income and trading stock acquisition.

We can’t stress enough how important it is for you to work out where you stand with your cryptocurrency mining/forging operations.

Arranging your affairs into the most tax advantageous structure at the beginning can reap many thousands, if not millions, of dollars in saved tax down the road.

Don’t come to regret it, give us a call today.