Tax relief plain for crypto miners

Despite the risks and costs involved, there appears to be growing numbers of UK individuals investing in cryptocurrency mining equipment in the hope it will generate them a passive income. Research by the University of Cambridge suggests that the UK’s share of Bitcoin mining internationally has more than doubled since 2019.

Cryptocurrency mining is a process which can generate new coins as a reward for helping to verify transactions. Taking Bitcoin as an example, an international network of computer equipment is needed to record and confirm every transaction. The energy and power required for this is high as the computers are solving complex cryptographic calculations and in return, the ‘miners’ can earn Bitcoin.

Whilst Bitcoin is the most popular cryptocurrency, there are many other coins that can also be mined. This is attracting individuals to invest funds in equipment, often referred to as mining rigs. A single mining rig is no small investment and can cost thousands of pounds.

With rising energy costs and a slump in the crypto markets generally, those who have invested into such equipment in recent years may be suffering from buyers’ regret. Unfortunately, that disappointment may be compounded as they may not benefit from any tax relief in relation to the equipment purchased.

When an individual acquires equipment to use in their business, they can often qualify for tax relief in the form of capital allowances. However, it is not always clear whether the activities of a cryptocurrency miner are of a sufficient scale to represent a trade for tax purposes. Each case needs to be looked at individually and HMRC’s guidance outlines that they will look at various factors such as the commerciality, risk and organisation of the mining activities.

Those who have acquired a single or small number of mining rigs may not meet this trading test and the coins they receive will likely be subject to income tax as ‘miscellaneous income’. Ordinarily, HMRC does not accept that individuals receiving ‘miscellaneous income’ can benefit from capital allowances, a fact specifically outlined in their guidance on the subject.

This may come as an unwelcome surprise to many new entrants to the world of crypto mining, who might have assumed that the expensive equipment costs involved could be set off against their taxable income. The dreams of a passive income may be turning into a nightmare.