How Is Crypto Taxed? Mining & Staking

Okay, mining. So cryptocurrencies, are validated and secured through what is commonly called mining. There are some other mechanisms, but for the purpose of this segment, we’re talking about proof of work in mining.

So the first sort of thing to look at would be, okay, are you just doing mining as sort of a hobby or are you doing it on a large enough scale, a large enough commercial scale to be a business?

So I suppose hobby would be, if you’re doing things like not, not too sophisticated. You’re only really getting into mining, just to, just to get access to a bit more crypto, that you otherwise might not have been able to get. So, you might just be using your home, home computer, although rather difficult to do mining, just with standard equipment these days. But, you know, sake argument, let’s just say using your home computer and you’re not even going out and buying anything extra, that’s going to be a hobby, most likely not a business. If you’re going out and buying a few different equipment, but it’s not, not really that sophisticated, you’re not getting special contracts, in terms of electricity, and the like, it’s most likely a hobby, especially if you’re just, hopefully producing the crypto as part of your mining activities, and then you’re just holding on to it, that crypto, uh, for the longer term, it’s most likely a hobby.

So in this case, what we’re talking about here is the production of, capital assets. So the, the cost of your mining essentially becomes the cost of the crypto that, that you produce. The date, that’s important to look at from capital gains tax point of view and the CGT discounts, when the crypto comes in. So it’d be very important to record day one, day two, day three, et cetera, et cetera, et cetera. How much crypto you earnt. From the accounting point of view, we basically go, okay, over this period, X amount of coins were produced, and the average cost per coin over that period based on the costs involved was this, and that becomes the cost for those, those crypto. And then when you subsequently sell it, if you sell it for more, you’ve got a gain, if you sell it for less, you’ve got a loss.

Different if it’s a business.

A business would be producing the assets once again. The majority of what you get in your mining is newly created, cryptocurrency. The block rewards, otherwise called. You know, there might be some element of fees in there, but at least at the time of recording this, this, online course, those fees are typically so minute, that from an accounting point of view, it’s impractical to really, consider those. You would just be looking at the, the block reward, and it’s a creation of new assets. So essentially, from your point of view as a business, that asset becomes trading stock. So inventory, it’s another term, that you might be more familiar with.

So now we just go, okay, what was the cost of producing the inventory?

Where it would be with that, which is the cost basically of the mining, becomes the cost of the inventory, the trading stock. And it’s when you sell that trading stock that you have profits or losses.

From an accounting point of view when it comes to businesses and trading stock, important here is that at the end of the financial year, you have to take a stock take, what do you hold on 30 June?

And that closing, closing stock needs to be taken into accounting your calculations, and you can choose to value trading stock at market value or at cost.

It gives you a little bit of flexibility around, what profit or loss to recognise, within the tax year. Because you can use, market selling value or cost, at that time.

But otherwise, and then that closing stock for the next year becomes the opening stock, which is then becomes sort of essentially a tax deduction. You’re not double dipping here, because you’ve had to, had to report the closing stock the previous year, essentially, almost like a, almost like a sale. Just sort of the simpler terms to look at it.

So if you’re, if you’re doing cost, you know, not producing any extra, any, any extra profit, most of the time you wouldn’t do, market selling value for your closing stock, if it was more than the cost, because otherwise then you got to pay tax on a paper profit because you actually haven’t sold it. But if the market selling value is less than the cost, you might value at that, which will bring forward a tax deduction for you, which could be beneficial.

Okay, so lots to do there. That’s so firstly that’s an important consideration.

Now I know I did say around production of an asset as a general rule there for the hobby and business. It isn’t actually that simple, which is why we need to run through the next few bits to actually work out because it might not have actually been necessarily just the production of an asset, it may have been also income.

So a way to, way to to think about that, here is sort of around, okay, first steps are, do you own the hardware? Or are you just leasing some hashing power? Otherwise, sort of commonly through a cloud mine.

So if you own the hardware yourself, the hardware itself, the equipment, the miners, those, those computer chips, that you have, they’re depreciable equipment, for you, if you’re, if you’re in business. And these days, most of the time, that’s instantly, be an instant write off, because of special, tax concessions there. But also, probably close to instantly depreciable, because most miners won’t last more than a year. So, yeah, technically, does need to be depreciated, but, almost going to last only a year, so write it all off almost instantaneously.

As opposed to say it was, cloud mining or leasing some hashing power, now you don’t actually own the hardware.

But because you don’t own the hardware, it’s not, it’s not depreciable. You don’t own it. You’re leasing it. So actually it’s a leasing cost. And here you’d have to look at terms and conditions. What is it? Do I actually own the hardware that’s over there and someone else might be hosting it? Or am I leasing the hashing power of equipment that someone else owns? So that’s important to consider, there.

Going back to the part where I was talking about, production of an asset or income. It sort of comes down to, okay, what mechanics, what mechanisms are in play here, okay?

So, a lot of times when we’re, we’re mining, we’re doing it in a pool. Which means that, we’ve got a hashing power and we’re putting it over there, into a pool. And so a whole bunch of other people are pointing at the pool. We’re all working together trying to, trying to, create cryptocurrency and get the block reward. So, and out of that, because we’re pointing it to a pool, the pool’s got its own, rules as to how we get paid.

So if we’re getting paid for our hashing power, simply for our hashing power, whatever we receive will be income at that point in time.

So it’ll be income, and then, because it’s most likely going to be paid in crypto, it’s also going to be an acquisition of an asset.

So this would be under, typically under the pay per share (PPS) scheme, or either similar. So if you see PPS, that’s the pool pay out scheme, pay per share. That essentially means that if I, you know, I’m hashing away and each hash that I do, it’s called a share. I contribute that to the pool and I get paid for every share that I contribute. No matter what, if the pool is lucky enough as a group to find and mine a new block, and get a block reward, it doesn’t matter. I’m definitely getting paid. So here I’m getting paid, for giving something over. So when I get paid, that is income.

It’s like if I got paid to go out and we were doing some, some dig, you know, and I got paid, I got paid for my effort for every single, every single, you know, shovel, shovel, dig something out of the ground, I get paid for every single one of those, that’s income to me. It’s very similar here to yourself, you’re a miner, if you’re getting paid, you don’t have any risk in terms of the block reward, that’s income.

And then what you receive. So what you receive, say if it’s 10 worth of crypto, I have to report that as income, and it also becomes the cost of that, that crypto. So when I eventually get rid of it, it appreciates in value, I’ve also got another profit.

Okay, slightly different, if I’m going into the pool and I only get paid depending on what we find, it’s the luck of the pool. With mining, as you most likely know if you’re watching this from this online course and you’re interested in this, is that, you’re mining away and you might not find anything. You might not find anything for days, but you might find something. But you might get extremely lucky, you might find several things. More than, more than you sort of should based on the hashing power for the group.

So if that’s the case, that’s just what we, what we find as a whole, and then we split it up. So we would split it up based on most likely everyone’s contribution hashing power, which is Pay Per Last N Shares (PPLNS) is a popular mechanism. So PPLNS, Pay Per Last N Shares. So, all the shares I contribute my hashing power sort of divided by all the shares that were contributed within a certain period. That’s my percentage of the block reward if we find it and I get that block reward no longer is that payment of income. It’s, it’s, it’s taking my share of what we jointly produced. And then I get to take off with it and then decide what I want to do with it.

So in this case, it’s not income at that moment. It’s just the production of an asset. So I attribute all my costs to that asset, that I’ve got, that crypto I’ve got, and when I eventually sell it, that’s when I’ve got the, income reporting to do.

So there you have it. That’s a, that’s a, that’s your proof of work mining for cryptocurrency. The tax implications, for getting into this, especially, with any degree of like commercial, scale. It’s very important to consider these aspects. Look at various things like your structure, to see if there’s any ways to take advantage of longer term tax planning.