Cryptocurrency mining costs: are expenses for electricity and mining rigs tax-deductible?

The method of acquiring cryptocurrencies via the “Proof of Work” method, also known as virtual currency “mining,” is a popular yet energy-intensive way of obtaining cryptocurrency. It uses devices with high computing power, usually based on powerful graphics cards (GPUs). The entire process involves significant energy consumption and expenses on devices known as “miners.” Taxpayers engaged in such activities are primarily interested in the possibility of including these costs as tax-deductible expenses related to income from the sale of virtual currency (Article 22(14) of the Personal Income Tax Act). While acquiring currency, for example on an online exchange, usually presents no major issues—costs being mostly limited to transaction fees—the situation with mining is more complex. Unfortunately, individual tax rulings in this area are highly inconsistent, and the tax authority’s stance contradicts administrative court rulings.

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Mining costs and taxes

The above was demonstrated by the addressee of an individual tax ruling issued on 30 August 2022 (ref. 0114-KDIP3-1.4011.656.2022.1.PZ). The applicant mined virtual currencies using electronic devices (including GPU graphics cards). The acquisition and sale of currencies were conducted outside business activity and exclusively on the applicant’s own account. The taxpayer asked in the ruling whether the “expenses directly incurred on the acquisition of virtual currency,” as referred to in Article 22(14) of the Personal Income Tax Act, should also include expenses related to mining virtual currency, such as the purchase of mining equipment and electricity consumption for that purpose.

The applicant argued in favour of recognising these costs as deductible expenses. They cited the ruling of the Regional Administrative Court (WSA) in Łódź of 19 November 2019, I SA/Łd 411/19, where the court distinguished between primary and secondary acquisition of cryptocurrency. The court held that primary acquisition consists precisely of mining bitcoins, which constitutes “production” of virtual currency, yet remains acquisition. Therefore, expenses incurred on acquisition (i.e., purchase of mining equipment and electricity) should be considered as directly incurred under Article 22(14) of the Act. Without purchasing appropriate mining equipment and electricity, mining by the Proof of Work method chosen by the applicant would be impossible. To support this position, the taxpayer also cited the WSA ruling in Łódź dated 21 July 2020, ref. I SA/Łd 285/20.

The tax authority’s position – electricity and mining equipment costs are not deductible expenses

The Director of the National Tax Information (Dyrektor Krajowej Informacji Skarbowej) disagreed with the applicant. It was pointed out that in the case of income from the sale of virtual currency obtained through so-called “mining,” expenses incurred on the purchase of equipment and electricity cannot be considered as expenses directly incurred on the acquisition of virtual currency under Article 22(14) of the Personal Income Tax Act, as these expenses are classified as indirect costs.

The authority argued that the mined virtual currency had never previously been subject to trading because it did not exist before mining. According to the tax office, if the legislator had intended taxpayers to be able to deduct all costs related to any form of obtaining virtual currency, the law would explicitly state this (for example, in the case of costs related to the sale of real estate, Article 22(6c) of the Personal Income Tax Act includes provisions on both acquisition and production costs). The authority considered that expenses on electricity, mining rigs, or renting premises for their installation may at most be connected with the taxpayer’s activity and generally contribute to income generation. However, the Director of the National Tax Information stated it is impossible to determine which specific income a given expense directly serves.

As can be seen, despite the generally favourable rulings of administrative courts for taxpayers, the tax authority continues to hinder virtual currency users. When planning investments in the cryptocurrency sector, it is worth considering the content of the latest individual rulings issued by the Director of National Tax Information in this regard to make an informed decision about primary or secondary acquisition of assets or to prepare for potential legal disputes. ATL Law offers its clients support in solving tax law issues, including preparing analyses, applications for individual rulings, and representation before administrative courts. We invite you to review our offer.

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