Cryptocurrencies are both investment opportunities and financial tools for entrepreneurs and business owners, and they have become increasingly popular with over 300 million users worldwide, and an increasing number of global businesses accommodating it as a payment method.
However, the decision to buy or trade in crypto is not one to take lightly. It’s key to do your research, just as you would with any other investment.
When will trading cryptocurrency be deemed a trade?
Only in exceptional circumstances would HMRC expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that it is deemed to be trading, and as such any income being chargeable to income tax rather than capital gains tax.
If an individual could potentially be deemed to be trading in cryptocurrency, the main factors HMRC look upon when deciding if such activities amount to taxable trades are:
- degree of activity
- organisation
- risk
- commerciality
If these conditions are met and the individual is deemed to be trading, any profits made from trading cryptocurrency will be taxable at the income tax rates of 20/40/45%, and national insurance would be due on any profits made if the Class 2 and Class 4 NIC thresholds were exceeded. Any losses could be utilised in the same manner as normal trading losses, so could be offset against other income in the year, carried back and offset against income from the previous tax year, or could be carried forward and offset against any future trading profits.
Mining Cryptocurrency
‘Mining’ cryptocurrency is a method of creating new tokens, often by using computers/computer hardware to solve mathematical problems in order to generate new tokens in the blockchain. Once the puzzle has been solved, an individual will receive the token generated, or if part of the puzzle is solved by an individual, they will receive a proportion of the token. It is very common for tokens to be split, and for a number of individuals to mine one token together, with each of them receiving part of the complete token.
Whether mining can be deemed a trade depends on the factors listed above. If deemed a trade, any profits will be taxable as trading profits, and will be liable to both income tax and national insurance. The sale of any tokens mined will give rise to an additional trading profit or loss.
If the mining activity is not deemed a trade, any profits made will be taxable as other income, and will be liable to income tax at 20/40/45%.
When tokens generated via mining are sold, (where mining activity is not deemed to be a trade), it will give rise to a chargeable gain liable to capital gains tax.
Related blogs in this series:
Cryptocurrencies part 1: The Basics
Cryptocurrency part 3: Niche Areas within Cryptocurrency
For further guidance on cryptocurrencies and their tax implications:
Before going any further, businesses and entrepreneurs should understand how cryptocurrencies are taxed, the tax guidance from HMRC, and key developments in the crypto tools that may impact how you invest.
For further guidance, please get in touch or contact your usual MHA advisor.
