If your cryptoasset mining activity is a profit-making scheme, you need to pay income tax on any profits you earn from the scheme. This may include paying tax on your:
- mining rewards when you receive them
- profits from selling your mining rewards.
If your profit-making scheme includes proof of stake mining (staking), you may also have to pay income tax on profits from selling your staked cryptoassets.
All amounts you get from the profit-making scheme are included as your income. This includes cryptoassets and money.
Working out if your cryptoasset mining is a profit-making scheme
Your mining activity may fall short of being a business. For example, if it is a small operation and is only carried on for a short time.
But if your main purpose for mining cryptoassets is to make a profit you may be using cryptoassets for a profit-making scheme. This is because mining is not a simple transaction. It generally involves a series of steps or a plan of action (a scheme).
Using cryptoassets for a profit-making scheme
If your cryptoasset mining is a profit-making scheme, work out what tax you’ll pay on your cryptoasset income.
Earning staking rewards through a staking-as-a-service provider
You might earn staking rewards through a third-party staking-as-a-service provider rather than running a staking operation yourself.
Priya starts mining Bitcoin early from her PC
Priya heard about Bitcoin in late 2010 through an online forum and liked the idea. She could see online that people were willing to pay 20 cents for 1 Bitcoin when just a month ago it had only been worth 6 cents.
Priya learned how to mine Bitcoin on her desktop computer. Over the next 3 years she earned thousands of Bitcoins. She sold some of her Bitcoin whenever she thought the price was good. She stopped mining in 2013 but continued selling her Bitcoins whenever she thought there had been a good increase in value.
Priya is carrying on a profit-making scheme.
While Priya is interested in the potential of Bitcoin generally, her main purpose for mining was to earn Bitcoin and make a profit from selling it. This profit-making purpose is clear from Priya’s actions over the years.
Priya will need to pay income tax on the:
- Bitcoin rewards and transaction fees she earned
- profits she made from the sale of Bitcoin.
Ariana sets up a cryptoasset staking operation
In 2014 Ariana heard about crypto X. It was a new coin in the crypto market that used proof of stake to validate transactions.
Ariana bought a large number of crypto X and set up a staking operation.
She earned staking rewards (paid in crypto X) and added them to her original stake of crypto X.
Ariana regularly spent time on her staking operation and looking at the crypto market. Whenever Ariana thought there had been a good increase in the price of crypto X she sold some to cash-out.
Over the next 3 years Ariana sold all her crypto X in a number of separate transactions.
Ariana was carrying on a profit-making scheme.
She had a speculative plan to make a profit from buying, staking and selling crypto X at the time she first purchased crypto X. She carried out that plan and make a profit from it.
Her purpose of making a profit from the scheme as a whole (not just from the staking rewards which were only a small percentage of her overall holding) was supported by her actions over the years.
Ariana will need to pay income tax on the:
- crypto X she received from staking
- profits from the sale of all her crypto X.