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Financial trading income
In exceptional circumstances, individuals may be classed as cryptoasset “financial traders” for some or all of their cryptoasset activity. This could be buying and selling cryptoassets, staking, mining or trading in cryptoasset derivatives.
Where this is the case, their profits are self-employed business profits, subject to income tax and national insurance. The capital gains regime for buying and selling cryptoassets is not applicable. Being classified as a trader rather than investor usually results in a higher tax bill.
If you are unsure if you are an investor or a trader, see our further guidance on this.
If the individual is conducting a financial trade, then Income Tax and National Insurance will be applied to their business trading profits. The trading income is the sterling equivalent (on the date of receipt) of the cryptoassets received.
The individual will need to be registered as a sole trader business with HMRC for Self Assessment and file tax returns. You can register online, but it is recommended to seek the advice of a qualified tax professional before registering your cryptoassets trading business with HMRC. See our guidance on registration with HMRC.
The allowable trading expenses (under the normal income tax rules for businesses) are deducted from the receipts to calculate a trading profit or loss.
Mining Electricity and Equipment
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 are silent on this in their guidance.
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 total trading and miscellaneous income for a tax year is less than £1,000 and the individual has no other self-employment, there is no tax to pay on this income and there is nothing to declare to HMRC.
However if you already file a Tax Return, it is recommended to declare the income and the use of the trading allowance, even where they net off to Nil taxable income.
If the trading and miscellaneous income is more than the £1,000 Trading Allowance, the individual can choose to simply deduct the £1,000 from their total income (with no deduction for actual expenses incurred), or calculate the trading profit and net miscellaneous income under the normal rules (income less allowance expenses).
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 trading or miscellaneous income where self employed expenses are being deducted from any self employed income.
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.
You can elect to disapply the Trading Allowance and this could be beneficial if you have made a loss.
A trading loss is much more useful than a loss under the miscellaneous income provisions, as it can be used in many different ways (such as against other income or carried forwards to set against future profits from the same trade).
However, HMRC have been known to challenge trading losses to deny trading loss relief. HMRC may either make a case that the taxpayer is not a trader, or that they are a trader, but they are not trading on a commercial basis with a view to making a profit.
The consequence of a successful HMRC challenge is that the trading loss cannot be offset against other income (ie employment); it can only be carried forwards against profits of the same trade.