If you’re currently mining crypto, it’s important to learn how cryptocurrency mining is taxed. This guide will help you assess your cryptocurrency mining tax obligations.
Cryptocurrency networks rely on the participation of miners, who contribute to the maintenance of the blockchain networks and are rewarded in the form of cryptocurrency. Crypto mining can be extremely profitable — but how does cryptocurrency mining tax work?
Crypto Mining Tax Basics: Hobby Miners Vs Commercial Miners
Cryptocurrency mining can be considered either a hobby or a commercial practice. The first step in determining the tax implications of crypto mining is confirming whether you are a hobby miner or a commercial miner.
Hobby Crypto Mining
Not all cryptocurrency miners operate massive racks of dedicated hardware. Hobby miners are typically cryptocurrency enthusiasts that participate in mining in order to support the growth or development of blockchain networks in a non-commercial manner.
Hobby miners commonly mine cryptocurrency with small-scale home-based cryptocurrency mining operations with no significant interest in the financial benefits of mining.
- Hobby mining tax implications:
- Coins generated through mining are defined as capital acquisition rather than income
- Operational and equipment costs are allocated as the cost of acquisition of coins generated through mining
- Gains made from the disposal of coins within 12 months of acquisition are taxed at 100%. Gains made on coins sold after 12 months from acquisition are taxed at 50%.
Commercial Crypto Mining
Large-scale cryptocurrency mining operations are considered commercial mining operations. Crypto miners that invest thousands of dollars into dedicated ASIC hardware for cryptocurrency mining or host equipment in data centers are defined as commercial miners.
The evolving definition of cryptocurrency and mining under tax law means it’s difficult to determine exactly when a hobby miner crosses the line into commercial mining.
- Commercial mining tax implications:
- The sale of coins generated through mining is defined as business income
- Equipment costs, operational costs, and losses are tax deductible
- Profits generated through mining is 100% assessable, are calculated utilising the trading stock rules.
- Cryptocurrency mining incurs GST compliance obligations
Mining, Consensus Methods and Tax
Different blockchain networks & cryptocurrencies operate with different consensus models, which require different methods of participation. The consensus method used to participate in cryptocurrency mining can determine whether a miner is a hobbyist or a commercial crypto miner.
Mining Proof of Stake or Proof of Holding blockchain networks typically falls under the category of hobby mining, while Proof of Work or Proof of Service mining is typically defined as commercial mining.
Cloud Mining, Leased Hardware Mining, and Pool Mining Tax
When assessing your cryptocurrency mining tax obligations, it’s important to consider additional mining methods that don’t involve operating your own mining hardware. The pool reward payout system used in pool mining, for example, can impact tax treatment.
Pay Per Share, or PPS payouts, are generally defined as 100% assessable income. Pay Per Last Shares, or PPLNS payouts are generally recognised as trading stock acquisition and assessable income.
Fullstack provides cryptocurrency miners with detailed assistance and guidance on cryptocurrency mining taxes. Understanding your crypto tax returns obligations can result in thousands of dollars of saved tax. To get started with a simple assessment of your crypto mining tax situation, reach out to our cryptocurrency accountants today.