Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.
Aside from being classified as a financial trader, there are a few other cryptoasset related activities that result in income tax liabilities. Mining income is one example of these. HMRC guidance states that whether such activity amounts to a taxable trade (with the cryptoassets as trade receipts) depends on a range of factors such as:
degree of activity
HMRC’s broad expectation is that the receipts of miners – those who are involved in verifying new cryptoasset transactions – will most likely be within the scope of miscellaneous income. HMRC considers that for most individuals the mining activity will fall short of meeting the badges of trade, so returns are only expected to be charged to tax as trading income in exceptional circumstances.
Just as for a financial trader, the facts need to be examined and this can be complex. It is recommended advice is sought from a qualified tax professional. Please refer to the detailed guidance ‘Financial Trading in Cryptoassets’ in the Appendix to Recap’s UK crypto tax guide, regarding the factors to be considered and how to register as self-employed with HMRC. This equally applies to a mining trader. If the mining activity amounts to a trade, the taxpayer needs to register as self-employed with HMRC and pay income tax and national insurance on the trading profits.
The trading receipts are the sterling equivalent (on the date of receipt) of the cryptoassets received. The allowable trading expenses (under the normal income tax rules for businesses) are deducted from the receipts to calculate a trading profit or loss. The tax rules for running your own business are complex. The HMRC Business Income Manual provides lots of guidance about the kind of expenses that can be deducted. We are still awaiting guidance from HMRC on business income and expenses regarding mining.
However, the HMRC guidance for individuals slightly touches on this by stating that the costs for mining activities (electricity and equipment) are not allowable costs for capital gains tax purposes. This implies they may consider them to be allowable trading costs, but the position is unclear. It is considered that under normal business expense principles the cost of additional electricity used in order to mine and capital allowances on the mining equipment used should be allowable expenses, but it is recommended a qualified tax professional is consulted as HMRC’s position is unclear.
If the mining activity does not amount to a trade, the sterling equivalent (at the date of receipt) of the tokens received from mining will be taxable as miscellaneous income subject to income tax. Additionally, fees received for verifying new transactions should be included within this mining income. Allowable expenses such as additional electricity used in the mining can be deducted from the income.
From 2017/18 onwards, there is a ‘Trading Allowance’ of £1,000. This is an automatic tax exemption that does not need to be claimed. Although it is called a ‘Trading Allowance’, it applies to both trading and miscellaneous income. Therefore, if the mining income for a tax year is less than £1,000, there is no tax to pay on this income and there is nothing to declare to HMRC.
However, if the individual also has a separate self-employed business (e.g. a plumber), care needs to be taken. The Trading Allowance cannot be claimed against the cryptoasset mining income if self-employed expenses are being deducted from any self-employed income.
The deduction of the Trading Allowance cannot create a loss. For example, if the income is £600, you cannot deduct the £1,000 Trading Allowance and claim a loss of £400. In this example, the Trading Allowance is restricted to £600, so that a loss is not created.
Here is an example from the ICAEW concerning cryptoasset mining income:
Mr A is a Bitcoin miner. He mines by leaving his personal laptop running overnight, where it verifies transactions added to the blockchain. In return for his efforts, Mr A received cryptocurrency worth £2,000 in the tax year. His electricity costs increased significantly; he considers that £200 of the additional expense relates to his mining activities, giving a net return of £1,800. Mr A had a profit motive, but his minimal activity means that the actions he took fall short of meeting the badges of trade. His £1,800 profit is therefore charged to tax as miscellaneous income.
Mr A retains the Bitcoin he received in the hope it will increase in value in the future. CGT will apply to any future increase in value of the Bitcoin.
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