Magic mushrooms are fungi that produce psilocybin, a compound with breakthrough status for treatment of mental health disorders. Wood-degrading species of Psilocybe, such as P. subaeruginosa and relatives, have high concentrations of psilocybin but are discouraged for clinical production due to a temporary paralytic side effect known as Wood Lover’s Paralysis, the cause of which is unknown. We studied P. subaeruginosa over its partial distribution in Australia based on genomic analyses of 89 isolates to investigate population structure and species boundaries, examine allelic diversity at psilocybin loci, and test its centre of origin. Psilocybe subaeruginosa is structured by geography in Australia, but geographically separated populations are fully sexually compatible. Allelic diversity among populations, such as at mating compatibility loci, is likely a result of genetic drift and minimal gene flow since differentiation from a shared ancestor. Movement of woodchips, mulch, or plants has most likely spread genotypes of P. subaeruginosa locally within Australia and to the northern hemisphere. Species from the northern hemisphere, namely P. azurescens and P. cyanescens, clustered among Australian populations, indicating shared ancestry and supporting a hypothesis these taxa are conspecific with P. subaeruginosa. We identified high allelic diversity in genes of the psilocybin metabolic pathway and haplotypes of P. subaeruginosa with either one or two putatively functional paralogs of psiH, however the functionality of this gene duplication is yet to be determined. Our study provides insights into the evolutionary history and species boundaries of P. subaeruginosa, which has a centre of origin in Australasia.