Mining bitcoin tax implications

Mining bitcoin tax implications:

During the eve of bitcoin’s conception, mining was an extremely profitable activity with a large return on one’s investment.

As time goes on and a larger number of bitcoin’s are mined, the resources needed to mine one bitcoin increase, which has ultimately reduced the profitability of bitcoin mining.

With the current rally of Bitcoin prices, profitability is starting to return to the mining of bitcoin, along with the enhancement of bitcoin mining equipment.

Prior bitcoin mining equipment, consisted of a desktop using its CPU to mine coins, (this being an extremely inefficient use of energy). GPU mining was the next leap in efficiency whereby computers used their graphics card, in order to mine coins.

Nowadays even GPU mining is considered inefficient (unless one has a bountiful supply of cheap electricity), and dedicated ASIC units are used with the sole purpose of mining bitcoins.

Separate to simply buying and holding bitcoins (or trading bitcoins), ATO has a separate tax treatment for individuals who mine bitcoin.

ATO treats miners as if they are running their own business and bitcoins are treated in the same manner as trading stock.

Currently as of 05/12/2017 miners can choose to value their stock using three different methods:

-Cost price method
-market selling value
-replacement value

Logic states (assuming bitcoin continues to increase in value) that using market value or replacement value would result in a large tax payable at years end (as the stock would increase in value)(any bitcoins exchanged (assuming a gain) will also be liable to pay tax on the increase.

However ATO has allowed the cost price method to be used for valuing Bitcoins, effectively, this means that the value of the bitcoin is merely the amount of electricity (and other sundries)(liaise with your local bitcoin accountant to go through the specifics) used to produce the bitcoins.

The means that the value of your stock does not increase throughout the year and there will be no tax payable at the end of the year as your stock value has not increased, however if you exchange the coins for cash (and the cash is worth more than the cost of acquiring the coins) then you will be liable for tax on the increase in value.

To accurately prepare your tax return, please be sure to visit your local bitcoin accountant.

4 comments

If I’m receiving an income from a cloud mining service am I able to claim back any expenses incurred in acquiring this service as well as ongoing fees?

Hi Roger,

Thank you for your query.

If you are deemed to be running a business, any expense related to “gaining assessable income” will be deductible (ie computers, electricity, internet etc).

It could also be deemed that the income is capital in nature (depending on your individual circumstances), in which case your deductions will be limited to the five cost base elements.

Generally speaking, mining volume, the intention to make profit, activities organized in a business like manner and the amount of capital invested are all factors in determining whether it will be treated as a business or a capital gain /loss.

Hope this helps, please contact us for further clarification.

Hi,

If I am mining Cryptocurrency as a private limited company, and selling half of the mined coins each month and keep the rest accumulating, should I pay tax on the AUD value of the sold coins and treat rest as trading stock at the end of the year? Since exchanges does not pay GST for my coin sales, do I have to pay GST from my company funds for the sold coins AUD value?

Hi Dan,

That is correct, you will pay tax on the coins which you have converted to fiat (less expenses).

The rest of the coins will be treated as trading stock (you may value this stock at cost (ie no realized gain until sale).

No GST will be applicable in your scenario when converting coins to FIAT.

Hope this helps.

James

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