Crypto Mining, BTC Halving & Tax Considerations

In today’s article, we will be addressing areas of concern and the tax implications of crypto mining, in particular mining Bitcoin (BTC). With all the crase stirring in the crypto market about the BTC halving anticipated for mid-month (April 2024) many of you may be wondering what the knock-on effect will be to miners.

BTC halving event

Built into BTC’s code by the anonymous creator (referred to by the pseudonym Satoshi Nakamoto) is a halving event that occurs once a certain number of blocks have been mined (approximately 210,000 blocks).

The halving event occurs approximately every 4 years with the last one being in May 2020. As the name suggests after the halving event takes place the number of BTC available to be mined is halved. Currently, there are approximately 900 BTC mined daily.

The halving mechanism is built into BTC’s code making it a deflationary asset which is a key feature in making it a popular storage of wealth whereas unlikely fiat currency that can be printed at will.

The halving may also deter miners from mining BTC further reducing its supply due to the same fixed and variable costs being incurred for half the reward.

BTC mining

The BTC mining process (Proof of Work or PoW) involves using computational power via computer hardware and software to verify transactions that occur on the blockchain. In the process of doing so compete with other BTC miners to solve cryptographic pussles where the winner receives BTC as a reward.

The forecasted daily rate for the BTC rewards will be 3.125 post-halving. 

Another form of crypto validators includes Proof of Stake (PoS) validators who use cryptocurrency assets that are staked or used as collateral to verify blockchain transactions.

While PoW and PoS mechanisms are both to validate transactions of the blockchain which keeps it operational, the tax outcomes according to the Australian Taxation Office (ATO) vary greatly. 

Tax on Mining

Crypto Mining as a Business

According to the ATO’s guidance (QC 70926 last updated November 2022), crypto mining (PoW mining) will be assessed as trading stock if you are carrying on a business of mining crypto. From a tax perspective, when you receive BTC (or otherwise) from mining it will be treated as trading stock.

Trading stock is assessed at the beginning (1st July 20XX) and the end of the financial year (30 June 20XX) and is accounted for at either its cost or market value. This is known as your opening and closing stock. Opening stock is included in your cost of sales and is recognised as a deduction while the closing stock is included in the ordinary income in the business schedule of your Income Tax Return.

A sale of the mined crypto will be treated as a sale and will add towards the ordinary income of the business for its market value at the time.


Crypto Mining as an Investment

If instead of mining as part of carrying on a business, you do so for investment purposes then it is likely that the mined crypto will be treated as a capital asset.

Mining crypto as an investment is rather complex, particularly when calculating the cost base of the mined crypto. Most commonly, the cost base of a capital asset is the amount that has been paid, and since there is no direct payment in receiving the mined crypto, we must explore other elements of the asset’s cost base to determine a value.

To this end, the incidental costs of the acquiring the mined crypto will likely be considered when calculating an appropriate cost base. The incidental costs may include the running costs of the crypto miners such as cloud service fees, electricity fees, and so on.

This must be calculated carefully and done on a reasonable basis therefore, it is recommended that you seek professional advice from a registered tax agent specialising in cryptocurrency.

If you are investing and selling or swapping mined crypto, a CGT event is likely to occur and result in either a capital gain or a capital loss.

This will result in a capital gain if the proceeds received (market value at the time of the swap, or the fiat received both calculated in Australian dollars (AUD)) is more than the cost base. Or this will result in a capital loss if the proceeds received is less than the cost base.

Important distinction

It’s important to note ordinary income and capital gains/losses impact your overall taxable position differently. For example, losses from carrying on a business may be used to reduce your overall taxable income (subject to the commercial loss rules), while capital losses can only be used to offset capital gains.

If you have excess capital losses left over in a financial year, the losses will likely carry forward and be available to reduce future capital gains. The use of capital losses to reduce capital gains is not optional and must be applied.

Impact to BTC mining

After the BTC halving event maintaining regular profit margins will become increasingly difficult. Many miners have already resorted to renewable energy to reduce electricity expenses (the dominant running cost of miners), which reduces the potential of reducing running costs to sustain profit margins post-halving. Alternatively, sustained, or increased profit margins may be enjoyed should the price of BTC double in value.

Historically speaking there is likely to be a significant increase in the price of BTC post-halving, this may take up to 12 months before correcting in value as investors take profits.

This may impact the daily supply of new BTC as miners may be turned off as they are no longer viable or are used to mine other cryptocurrencies. If this is to happen and should the demand for BTC remain the same, the price of BTC would increase as a result.

So, you are mining BTC or thinking of doing so, where to from here?

Like any other change in conditions, careful planning and consideration must be taken concerning your affairs. Many in the crypto community are bullish on the impact of the BTC halving however, realistically we don’t know what to expect. It is important then to review the associated risks and your risk tolerance.

Record-keeping Considerations

Like with most crypto affairs, record-keeping is a key component to ensure you remain compliant when filing your taxes. By keeping appropriate records, you reduce the risk of misreporting your activity and maximise your deductions. Some key takeaways from a record-keeping perspective:

  • Keep a record of your mining activity (for example an MS Excel document)
  • Keep all invoices for the purchase of computer hardware and software
  • Keep all invoices and remittances from cloud mining service providers
  • Keep records of all other expenses incurred from the mining activity
  • Keep an updated logbook of all the centralised exchanges and self-custodian wallets used
  • Seek professional tax advice from a crypto specialist tax agent such as Fullstack Advisory to establish a strategy that works for you.

Reach out today!

As one of the original and largest crypto tax and advisory firms in Australia, Fullstack Advisory’s crypto tax team is committed to your success.

We are committed to providing exceptional ongoing tax compliance and advisory services to the crypto community.

Our crypto tax team has extensive knowledge and experience working with crypto matters from day one, including complex DeFi situations, tax structuring and strategy advice, and more.

We understand that your affairs are unique and as part of our commitment welcome you to schedule a free 15-minute consultation to discuss your affairs and how we can help. Reach out to the Fullstack Crypto Team today.

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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech & online companies.

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