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Article

The Income Tax implications of crypto-mining

Article

The Income Tax implications of crypto-mining

21 Jun 2022

2 minute read

With the upcoming merge of the Ethereum 2.0 update rumoured to be implemented this year, it is important to remember that there may be income tax implications for cryptoasset investors who play a role in verifying blockchain transactions.

The Income Tax implications of crypto-mining - news article image

With the upcoming merge of the Ethereum 2.0 update rumoured to be implemented this year, it is important to remember that there may be income tax implications for cryptoasset investors who play a role in verifying blockchain transactions. 

A public decentralised blockchain system relies on its participants to validate transactions occurring on the blockchain. This is done using a “consensus mechanism”. 

One of the main changes of the Ethereum blockchain is the change of its consensus mechanism from a proof-of-work (PoW) model that requires miners to validate the blockchain, to a proof-of-stake (PoS) model which requires individuals to stake the native coin in order to become a validator. 

Mining involves using computers to solve a randomly generated complex puzzles in order to win the right to add a new entry to the distributed ledger. The person that holds that right is then rewarded, usually by the allocation of a quantity of new tokens that are released into circulation.

Staking involves investors locking up their tokens in order to support a blockchain network. The right to create a new entry is determined randomly with odds being increased by a user’s stake. The verifying transactions are rewarded with fees for facilitating the transaction. 

As with the Capital Gains Tax implications of cryptoassets that my colleague Peter Jones discussed in his article (https://www.shawgibbs.com/news/cryptocurrency), individuals who are mining or staking must also be considerate of the income tax implications that can arise when receiving rewards from these actions. 

Depending on a range of factors such as: degree of activity, commerciality, organisation and risk, the activity could be treated as a taxable trade with the rewards treated as income receipts. 

If the activity is not to the level where it would be considered a trade, then there are still income tax implications on the rewards. Currently, HMRC advises that the rewards from these activities will be taxable as miscellaneous income and therefore subject to income tax at the basic, higher or additional rates. 

The awarded token’s pound sterling value at the time of the receipt will be taxable, however you will be able to reduce the amount chargeable by deducting appropriate expenses. 

Should the individual keep the awarded assets then there may also be Capital Gains Tax to pay when they are later disposed of. 

If you would like any advice on whether your activity will amount to a trade, or the Income Tax implications of the activity then we would be happy to assist you with this.

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Need expert advice?

Speak to an expert for advice on
+44-1865 292200 or get in touch online to find out how Shaw Gibbs can help you

Email
info@shawgibbs.com

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