Cryptocurrency Mining & Staking

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

Where to begin? What a minefield!

Cryptocurrency mining and staking 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… there’s just so many different variants of mining and staking and as a result you’ll be subject to different tax treatment depending on what you are doing.

Hobby vs Commercial Operations

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

Hobby Miner/Staker

A hobby miner or staker is someone who participates in cryptocurrency mining/staking as an enjoyable pastime not in a business-like manner seeking commercial profits.

Their investment in mining/staking 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 staker, then broadly speaking this may be 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/Staker

A person conducting their mining/staking in a large scale business operation is a commercial miner/staker.

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/staking.

You may also be in the business of mining/staking 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/staking.

If you’re a commercial miner or staker, then broadly speaking this may be 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/staking, 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 utilised by a blockchain can influence the tax treatment. How so?

Well, because each system requires a different level of input by the miner/staker, 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 Contract

Wow; who knew there were so many ways to mine cryptocurrency and more importantly that it can affect your tax liability. Yep, we need to look into whether you are solo mining/staking, pool mining/staking 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.