CLEANSPARK, INC. Income Taxes Disclosure

14. INCOME TAXES

The Company recognizes deferred tax assets, net of applicable reserves, related to net operating losses (“NOLs”), tax credit carryforwards and certain temporary differences. The Company recognizes future tax benefits to the extent that realization of such benefit is more likely than not. Otherwise, a valuation allowance is applied.

The effective income tax rate for the years ended September 30, 2025, 2024 and 2023 as a percentage of pre-tax income is 9.7%, (2.3%) and (1.8%), respectively. The significant reconciling items between the effective tax rate and the statutory tax rate for the years ended September 30, 2025, 2024 and 2023 consist of valuation allowance, adjustments to deferred taxes, state taxes, and permanent items. A detailed breakout is provided below:

Deferred income taxes are the result of timing differences between GAAP accounting and tax basis of certain assets and liabilities, timing of income and expense recognition of certain items, and tax attributes such as net operating loss carry-forwards. These differences result in deferred tax assets and liabilities, which are recorded in the balance sheet, net of valuation allowance. The Company evaluates the realizability of its deferred tax assets and assesses the need for a valuation allowance on an ongoing basis. In evaluating its deferred tax assets, the Company considers whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of deferred tax assets depends upon generating sufficient future taxable income prior to the expiration of the tax attributes. This assessment requires significant judgment.

For balance sheet presentation, the Company nets deferred tax assets and liabilities within a given tax jurisdiction. When the amounts relate to different jurisdictions, the Company presents net deferred tax assets (net of valuation allowance) and net deferred tax liabilities separately within noncurrent assets and noncurrent liabilities, respectively. The following table summarizes this presentation:

In accordance with ASC 740, Accounting for Income Taxes, the Company evaluates its deferred income taxes to determine if valuation allowances are required. Pursuant to U.S. income tax accounting standards, companies assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence using a “more-likely-than-not” standard. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible. The Company considers the scheduled reversal of deferred tax liabilities. To fully utilize the NOL carryforward, the Company will need to generate sufficient future taxable income in each respective jurisdiction. Due primarily to the Company’s history of losses, it is more likely than not that all or a portion of its deferred tax assets as of September 30, 2025 will not be realized.

The Company recorded a valuation allowance to offset deferred tax assets that were not considered realizable for the tax years ended September 30, 2025 and September 30, 2024. The valuation allowance decreased from $54,926 as of September 30, 2024 to $3,389 as of September 30, 2025, primarily due to an increase in deferred tax liabilities related to the fair value appreciation of bitcoin during the current year, which resulted in an increased utilization of deferred tax assets.

As of September 30, 2025, the Company had $471,578 of federal and $154,423 of state NOL carryforwards available to reduce future taxable income, of which federal net operating loss carryforwards of $464,997 and state net operating loss of $76,663 have an indefinite life. The deferred tax asset for the state NOL is presented net of the uncertain tax position. The federal NOL will begin to expire on September 30, 2027, while the state NOL will begin to expire in the year ending September 30, 2036.

The Company's ability to utilize its federal and state NOL carryforwards and federal tax credit carryforwards to reduce future taxable income and future taxes, respectively, may be subject to restrictions attributable to equity transactions that may have resulted in a change in ownership as defined by Internal Revenue Code Section 382 (“Section 382”) or comparable provisions of state law. Tax attributes that exceed the Section 382 limitation in any year continue to be allowed as carryforwards until they expire and can be used to offset taxable income for years within the carryover period subject to the limitation in each year. Given the Company’s significant U.S. tax attributes, we continuously monitor potential ownership changes under Section 382. The Company completed a detailed study and determined an ownership change (as defined under Section 382) occurred during the third quarter of 2020, fourth quarter of 2020, and second quarter of 2023, triggering the application of Section 382. We do not currently expect any resulting Section 382 limitations on the use of our tax attributes to have a significant impact on our financial statements.

The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than a 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company records interest and penalties related to unrecognized tax benefits in income tax expense, if applicable. The Company has no liability, interest or penalties for unrecognized tax benefits as of September 30, 2025 and 2024. The Company does not anticipate the need to record a liability for unrecognized tax benefits within the coming year.

The Company files income tax returns in the U.S. federal and state jurisdictions. As of September 30, 2025, the 2021-2023 tax years generally remain subject to examination by the IRS and 2020-2023 tax years generally remain subject to examination by various state taxing authorities, although the Company is not currently under examination in any jurisdiction. However, as we utilize our net operating loss carryforwards, prior years can be subject to examination from 2007 forward.

On July 4, 2025, the One Big Beautiful Bill Act (the “OBBBA”) was enacted into law, introducing significant amendments to U.S. tax legislation with varying effective dates. Key provisions that impact the Company include the expansion of bonus depreciation, accelerated expensing of research and development costs, and changes to Section 163(j). The Company has incorporated these amendments into its September 30, 2025 tax provision as applicable, and there was no material impact to our income tax expense or effective tax rate. The Company continues to evaluate the legislation.

Included in the balance of UTBs as of September 30, 2025 and 2024, are no tax benefits that, if recognized, would affect the ETR. Also included in the balance of UTBs as of September 30, 2025 and 2024 are $6,005 and $0, respectively, of tax benefits that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes. We recognize interest accrued related to UTBs and penalties as income tax expense.