Cryptocurrency mining has surged in popularity across the UK, reflecting both global trends and the nation’s burgeoning interest in digital assets. This growth has prompted the UK government to introduce a legal framework to regulate and tax crypto mining activities.
This guide aims to provide comprehensive insights into the UK’s crypto mining taxation laws. It will cover essential topics such as the HMRC definition of crypto mining, the specific mining tax regulations in the UK, the practical aspects of compliance, tax planning strategies, and more.
This guide is part of our series: UK Crypto Tax
UK Crypto Mining Taxation at a Glance
- Crypto mining taxation depends on the level of professional activity involved, with different rates and rules applying to individual miners and mining businesses.
- Mining as a hobby requires reporting income under “miscellaneous income”
- Mining as a trade involves taxation as trading profits
What is Crypto Mining?
Crypto mining is the process of validating and recording transactions on a blockchain. Miners solve complex mathematical problems, and in return, they receive newly minted cryptocurrency, ensuring integrity and chronological order within the digital currency’s ecosystem.
Understanding how crypto mining works requires delving into the mathematics and algorithms that miners must solve. Miners use powerful hardware to solve these complex equations, and the first to do so gets to add a new block of transactions to the blockchain. This process both validates transactions and releases new cryptocurrency into circulation as a reward to the miner.
Crypto mining’s importance in the blockchain ecosystem cannot be overstated. It ensures the integrity and chronological order of the blockchain, making it immune to fraud and manipulation.
By rewarding miners with new cryptocurrency, it also sustains the ongoing creation and circulation of digital assets. This intricate interplay between technology, economics, and mathematics makes crypto mining an essential and exciting part of the broader world of digital currencies.
An alternative to crypto mining is called crypto staking. You can read all about it and its tax implications here: Crypto Staking Taxes.
Tax Regulations for Cryptocurrency in the UK
The taxation of cryptocurrency in the UK is governed by HM Revenue & Customs (HMRC), which has issued detailed guidance on how various crypto transactions should be treated for tax purposes. You can read all about it in our UK Crypto Tax Guide.
In the eyes of HMRC, cryptocurrency is classified as property rather than currency. This classification greatly impacts how cryptocurrencies are taxed and opens a variety of legal considerations.
Two primary taxes apply to crypto transactions: Income Tax and Capital Gains Tax. Income Tax is levied on the profits from trading cryptocurrencies, including crypto mining activities, while Capital Gains Tax applies to the gains realized from the sale of crypto assets.
How Is Crypto Mining Taxed?
Crypto mining taxation is based on the amount of professional activity involved. Income Tax rates for individual miners range from 0% to 45%, based on the income tax bracket. Mining rewards are tax-free when the total yearly income is below £12,570.
Any future sale of mining rewards is subject to Capital Gains Tax, based on the difference in value between the time of receipt and sale. The CGT rate on assets such as cryptocurrencies ranges from 10% to 20%, depending on the income range. Capital gains are tax-free when they fall within the Capital Gains Tax allowances (£6,000).
Learn more about crypto tax rates: UK Crypto Tax Rates
Different tax rules apply to mining businesses, who may fall under corporate tax regulations, with rates established based on the size and structure of the entity.
Badges of trade: How to know if mining is a hobby or a trade
Understanding the taxation of crypto mining requires a comprehensive examination of various legal and financial aspects. HMRC has published guidelines known as the badges of trade to assist in assessing the level of professional activity.
|Badge of trade||Meaning|
|Profit-seeking motive||An intention to make a profit supports trading, but by itself is not conclusive.|
|The number of transactions||Systematic and repeated transactions will support ‘trade’.|
|The nature of the asset||Is the asset of such a type or amount that it can only be turned to advantage by a sale? Or did it yield an income or give ‘pride of possession’, for example, a picture for personal enjoyment?|
|Existence of similar trading transactions or interests||Transactions that are similar to those of an existing trade may themselves be trading.|
|Changes to the asset||Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?|
|The way the sale was carried out||Was the asset sold in a way that was typical of trading organisations? Alternatively, did it have to be sold to raise cash for an emergency?|
|The source of finance||Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?|
|Interval of time between purchase and sale||Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset, which is to be held indefinitely, is much less likely to be a subject of trade.|
|Method of acquisition||An asset that is acquired by inheritance, or as a gift, is less likely to be the subject of trade.|
Courts have typically used these badges of trade to make determinations on trade matters by evaluating the overall impression derived from examining all the badges collectively.
Additionally, the weight to be attached to each badge will depend on the precise circumstances. A single badge’s presence or absence is unlikely to definitively answer whether a trade is taking place.
Read more about it in our guide: UK Crypto Tax – Investor or Trader?
Mining crypto as an individual (hobby mining)
If you are mining crypto as a hobby, the income generated must be reported under the category of “miscellaneous income” on your tax return.
In this situation, the income will be determined by the fair market value of the cryptocurrency in Pound Sterling at the time you receive it.
You can deduct relevant expenses from this income before including it in your taxable income, with the details available at the designated location.
Remember, when you later sell or otherwise dispose of this crypto, it will be subject to Capital Gains Tax.
Mining crypto as a trade
When crypto mining is categorized as a trade, following the previously mentioned badges of trade, the income derived from mining would be taxable as trading profits.
In this case, we highly recommend consulting a tax professional.
Can crypto miners deduct expenses in the UK?
According to the HMRC Cryptoassets Manual, the expenses related to mining activities, such as the cost of equipment and electricity, cannot be counted as allowable costs when calculating taxes for tokens.
This is because these costs are not solely and directly related to acquiring the tokens. Therefore, they don’t meet the specific requirements outlined in section 38(1)(a) of the Taxation of Chargeable Gains Act (TCGA) 1992.
In simpler terms, you can’t reduce your taxable income with these costs because the law doesn’t consider them directly connected to buying the tokens.
If your mining activity is considered a trade for tax reasons, the tokens you mine are initially counted as part of your business inventory or trading stock. If you later move these tokens out of your trading stock, for tax purposes, it’s as if your business bought them at the value recorded in your trading accounts.
When you eventually sell or otherwise get rid of these tokens, you should use this value as an “allowable cost.” This means you can deduct this value from your income when calculating your taxes, reducing the amount you owe.
Record-Keeping and Compliance
Proper record-keeping is pivotal for crypto mining operations, not only for organizational efficiency but also for ensuring compliance with tax laws. Accurate records aid in tracking both mining income and expenses, supporting transparent financial management and tax reporting.
Various tools and methods are available for tracking mining income and expenses, ranging from specialized software designed for crypto to traditional spreadsheet applications.
Our free crypto portfolio tracker makes record-keeping a breeze. Simply connect your wallet using its public address to automatically track every transaction and value.
File your mining taxes easily with Blockpit
Blockpit creates the most comprehensive crypto tax reports in PDF format.
Your individual crypto tax report provides information about all your balances and transactions and can be used as proof of origin with banks or tax advisors.
It contains all relevant transactions of your account in the selected tax year and shows details such as timestamp, amount, asset, costs and fees of the individual transactions.
Using Blockpit couldn’t be easier:
1. Import your transactions
Blockpit offers direct integrations for crypto exchanges, wallets and DeFi protocols. Automatically import your transactions via API integration, wallet address synchronization, or by manually uploading an Excel file.
2. Validate & Optimize
Blockpit offers smart insights and suggestions to optimize your tax report, fix issues, add missing values and to validate your transactions.
3. Generate your tax report
Generate your compliant tax report with the click of a button. Our tax engine calculates your tax report on the basis of the UK tax framework.