Australia produces 75,000 tonnes of spent coffee grounds (SCG) and coffee chaff a year. SCG is produced by the hospitality industry, while coffee chaff (also called silverskin) is a by-product of the coffee roasting process and contains a higher caffeine and nitrogen content than SCG. These coffee wastes are currently disposed of largely by incineration or landfill, but their use as growth substrates for exotic mushrooms may reduce their impact on the environment. For example, oyster mushrooms (Pleurotus ostreatus) have been grown successfully with SCG, and extractable caffeine in the substrate was broken down to xanthine derivatives during mushroom production. In this study we have grown king oyster mushrooms (Pleurotus eryngii) with coffee chaff, using a pasteurized Eucalyptus mulch (EM) substrate that contained varying proportions of coffee chaff (CC) and sugarcane straw (SC). Extractable caffeine in the growth substrates was measured by HPLC during mycelium growth and fruitbody formation, and up to 80% of the caffeine was removed during growth when higher proportions of coffee chaff were used in the substrate mix. A distinct bacterial community developed in the substrates with higher proportions of coffee chaff (Unweighted UniFrac beta diversity analysis), compared to those with less or no coffee chaff. Substrates with more coffee chaff showed that Bacillus and Geobacillus were the dominant taxa, while substrates with no or less coffee chaff had no clear dominant taxa. Mushroom production using coffee chaff in the substrate therefore has the potential to provide a sustainable alternative waste management stream for coffee production wastes in Australia.