Psilocybe subaeruginosa is reliably associated with southern Australia and Tasmania, where records are concentrated in wetter temperate districts. Geography matters here because reports from outside Australia often involve different, similar-looking wood-loving Psilocybe species.
It typically fruits on decaying wood chips, woody debris, and enriched soils in gardens, park mulches, and forest edges, especially in cool, moist conditions. Finding it on woody material, rather than directly from dung or open grassland, helps narrow identification.