Tax Treatment of Capital Assets in Cryptocurrency Mining

We’ve recently been asked to discuss the tax treatment of capital assets purchased for cryptocurrency mining. In most situations capital assets (such as computers or graphics cards) are used 100% for the cryptocurrency mining operation and depreciation is claimed. The below examples considers a more complex (but frequent) situation and we have outlined the tax treatment and consequences to be aware of.

“Hi Tim, I have a large monthly power bill because of my cryptocurrency mining operation. I’m looking to install solar panels on my house to reduce my monthly power bill and increase my return on cryptocurrency mining. What tax deduction can I get for the solar panels?”

Throughout this article we have considered the tax payer to be a sole trader or partnership. A company or trust structure has other factors to consider.

Tax Deduction

Because the solar panels are likely to cost more than $500 they are a capital asset and no immediate tax deduction is available. However, depreciation can be claimed. Depreciation is a tax deductible expense which reflects the decrease in the value of the asset (the solar panels). It is calculated by a depreciation rate provided by the IRD. For solar panels, the depreciation rate is 16% pa diminishing value.

Example 1: if the solar panels costs $10,000, a $1,600 tax deduction for depreciation is allowed in year one (16% of $10k is $1,600). This would result in a closing book value of $8,400 (being $10,000 less $1,600). The second year results in $1,344 depreciation claim (16% of $8,400) and the closing book value would be $7,056.

Private Use Adjustment

Because the solar panels are also likely to used privately (to power the rest of the house), an adjustment is required to account for the private use.

Example 2: if 80% of the monthly power relates to the mining operation than only 80% of the depreciation is claimed for tax purposes; the balance (20%) is private. In year one, $1,600 depreciation claim x 80% business, results in $1,280 being tax deductible.

Determining the ratio between business use (mining) and private may be difficult unless you can measure directly how much power the mining operation is using. In some cases clients have established a yearly average of their household power consumption prior to the mining operation commencing and can accurately measure the increase in power consumption (and cost) relating to the cryptocurrency mining operation.

The private depreciation is non-deductible for tax purposes.

Ceasing Business Operation (wash-up)

There are tax consequences if you were to stop mining or sell the house (with the solar panels). These events would trigger the solar panels to exit the tax system requiring a deemed sale at market value.

The difference between the market value (which is the deemed sale value) and the closing book value (cost price less the depreciation claimed), is depreciation recovered, or a loss on sale. This is taxable income or a taxable expense.

Often IRD depreciation rates (the 16% rate supplied by IRD) do not reflection the actual decrease in market value and the wash-up calculation on disposal, accounts for any excess or shortfall depreciation claimed.

In reality, it may be difficult to determine the market value of the solar panels. Trade Me may provide comparative values for similar condition second hand solar panels.

Example 3: the table below continues with the examples above.  $10k of solar panels purchased which are depreciated at 16% pa and used 80% for the business. The business (80%) is the tax deductible depreciation claimed each year.

Closing Book
Year 1 1,600 1,280 320 8,400
Year 2 1,344 1,075 269 7,056
Year 3 1,129 903 226 5,927

At the end of year 3, the mining operation ceases and the closing book value is $5,927. We have used two further examples to show the wash-up calculation.

Example 4: Market value at end of year 3 being $8,000. This results in a gain on disposal of $2,073 of which 80% ($1,658) relates to the business portion and would be taxable income.

Closing Book Value 5,927
Sale Value 8,000
Gain on disposal 2,073
80% Business 1,658

Example 5: Market value at end of year 3 being $4,000. This results in a loss on disposal of $1,927 of which 80% ($1,542) relates to the business portion and would be a taxable loss.

Closing Book Value 5,927
Sale Value 4,000
Loss on disposal (1,927)
80% Business (1,542)

In summary, the depreciation on capital assets are tax deductible. It is important to understand that depreciation is a timing adjustment only, calculated based on an IRD percentage, and a wash-up calculation is required when the asset leaves the tax base (on disposal or cessation of the business).

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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