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.
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.
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?