I would like some clarification on the cost base for cryptocurrency mined as a hobby. I have seen conflicting opinions on this. Some say that the cost base should be zero, and others that the cost base should be the market value at the time it is mined. I've asked this question before and haven't got a straight answer.In my opinion the only thing that makes sense is that the cost base is the market value at the time of mining, for a number of reasons. Firstly; mining as a hobby no expenses can be claimed, and secondly, mining cryptocurrency (as a hobby or otherwise) definitely has a cost in electricity, which can even exceed the market value.Say one is interested in a new cryptocurrency and wants to experiment with it. The easiest way to obtain it may be via mining as most new cryptocurrencies cannot be purchased directly with fiat. Otherwise it may entail purchasing Bitcoin or another more established cryptocurrency and then using that to trade for the new cryptocurrency on an obscure exchange, which is less convenient. Note that mining may actually entail spending more on electricity than the cryptocurrency is worth, but if this is a hobby interest that may not be a prime consideration.However, if the cost base of the mined cryptocurrency is zero, and it is later sold then one incurs a capital gain for the market value when it was mined plus any subsequent gain, and one has to pay tax on that full value in addition to the fact that one paid more than market value for it in the first place! It certainly was not free, so why would the cost base be zero?The disparity can also be illustrated like this: If the cost base of hobby-mined cryptocurrency is zero and one mines $100 worth, then later sells it for $200, one has incurred a capital gain of $200. However, if one earns $100 in cash from a hobby, and then uses that to buy $100 of cryptocurrency then the cost base is $100 and if it is later sold for $200 then the capital gain is $100. Similarly, if one is given $100 in cryptocurrency as a barter payment for hobby activities the cost base would also be $100. So, why would there be any difference? Hobby-mining cryptocurrency is really just a fancy way of buying it through a kind of barter arrangement; supplying hash power in exchange for the cryptocurrency.Can I have an ATO qualified answer to this please?
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Hi @SetiMaster,
We have recently answered a similar post to yours, it is quite informative and you can view our response here. Our community member who responded is well informed on crypto and has given some great information. We also have information on how crytpo and CGT is looked at on our Knowledge base response. Our website has guidance on understanding the difference between hobby or business.
Please use the links for further information.
All the best.
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Hi @SetiMaster
We will check with our crypto team.
Hi @SetiMaster,
We have recently answered a similar post to yours, it is quite informative and you can view our response here. Our community member who responded is well informed on crypto and has given some great information. We also have information on how crytpo and CGT is looked at on our Knowledge base response. Our website has guidance on understanding the difference between hobby or business.
Please use the links for further information.
All the best.
Hi @Jodie_ATO,
Unfortunately that doesn't really answer my question. I've already established that I am mining as a hobby.Let me ask the question in a form that requires a yes or no answer; Is the cost basis of cryptocurrency mined AS A HOBBY the market value at the time of mining? Yes or no?As I said the rationalisation behind this is that if one were paid in cryptocurrency for other hobby activities as a barter deal then the cost basis would be the market value. So, why would hobby-mining be different from any other hobby?
Hi @SetiMaster
The cost base of the cryptocurrency you generate as mining rewards will be zero. The cost of the miner and the electricity to run it are not included in any of the elements of the cost base of the cryptocurrency you generate through your hobby mining.
You can’t claim any expenses you incurred in pursuing a hobby. As a hobby miner, the mining rewards you receive are not assessable income when you receive them. The mining rewards (cryptocurrency) you generate through your hobby mining are CGT assets and you will have a CGT event when you dispose of (or otherwise deal with) your tokens. Any time a CGT event happens to an asset of yours, you need to calculate whether the event results in a capital gain or a capital loss. Each capital gain or capital loss you have during an income year is relevant to determining your net capital gain for an income year (which you pay tax on) or your net capital loss (which you can carry forward to offset capital gains in later income years).
I believe the cost of hobby mined cryptocurrency should be in line with s108.30 that is, the cost base is the same as any other CGT asset (but disregarding the 3rd element of the cost base - costs of owning an asset).
From what I can see, you would only include the cost of electricity is generating the crypto as the cost base (incidental costs of owning a CGT asset - 2nd element costs) - assuming you can evidence/substantiate it.
Hobby activities which creates an asset is different to bartering in my eyes and thus applying the market value would only occur in the latter but not the former.
@TaxedoMask Thanks for your reply.The issue with claiming electricity as part of the cost basis is that electricity is an expense and hobby activities can't claim expenses. With regards to your statement: "Hobby activities which creates an asset is different to bartering in my eyes and thus applying the market value would only occur in the latter but not the former." How is it different?I'll point out that "hobby-mining" is, generally, NOT directly mining cryptocurrency. The vast majority of hobby-miners (and probably even a large portion of mining businesses) are not solo mining and creating the cryptocurrency directly. What they do tend to do is supply hash power to a mining pool that does the actual mining, and they are "rewarded" with cryptocurrency in return. The cryptocurrency received doesn't even need to be the same cryptocurrency that is being mined. So, providing hash power to a mining pool, while colloquially referred to as "mining", isn't really mining in the strict technical sense at all. It *is* a barter arrangement. So, why would the cost basis be anything other than market value?
Hi @KylieATO,Thank you for your reply. I have a few questions with regards to your response:
- "The cost base of the cryptocurrency you generate as mining rewards will be zero. The cost of the miner and the electricity to run it are not included in any of the elements of the cost base of the cryptocurrency you generate through your hobby mining." What is the reasoning behind the cost basis being zero? If one were to be rewarded in cryptocurrency for any other hobby activity - for example, painting a portrait for a friend - then the cost basis of the cryptocurrency received would be the market value at the time. Why would hobby-mining be different?
- "You can’t claim any expenses you incurred in pursuing a hobby." I understand that. And this in fact is WHY the cost basis should not be zero. As I have pointed out "mined" cryptocurrency is not free. There is a cost, which can even exceed the market value, depending on the motivation for "mining" it.
- "As a hobby miner, the mining rewards you receive are not assessable income when you receive them. The mining rewards (cryptocurrency) you generate through your hobby mining are CGT assets and you will have a CGT event when you dispose of (or otherwise deal with) your tokens." I understand that they are CGT assets. However, unless one is solo mining they are awarded, not "generated". And cryptocurrency received for any other hobby activity is also a CGT asset for which the cost basis would be market value. Why the inconsistency?
I think the ATO are making a mistake by not understanding what the process of "hobby-mining" actually is. Most hobby-miners are not, in fact, mining in the strict technical sense at all. They are providing hash power to a mining pool which does the actual mining, and being rewarded cryptocurrency in what is, essentially, a barter arrangement. i.e. Hobby-miners do NOT generate an asset. They are providing a service in exchange for cryptocurrency. The cryptocurrency received does not even need to be the same as the cryptocurrency mined. Take "NiceHash", for example; individuals make GPU hardware available to the service and are "rewarded" in Bitcoin. The GPUs might be running a hash algorithm for a completely different cryptocurrency like Ethereum.So, there is an important technical difference between true cryptocurrency "solo" mining, and mining on a pool, which is what most hobby-miners do, and it should be treated as a barter arrangement like receiving cryptocurrency for any other hobby activity.I really think the ATO need to revise their advice on this.
Hi @SetiMaster,
Please contact our Early Engagement team for further specific tailored advice.
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