I have to have a word with myself about marketing. This is not a blog that is likely to attract the passive perusal of a passing punter, no matter how much alliteration I put in the opening line. It IS, however, a blog you’d want to read if you’re involved in mining – at any level – for Crypto currency.
If you’re not sure what mining is, then you’re probably getting a bit ahead of yourself here, but if you do and you’re already doing it, or thinking about it, then you’ll need to read on.
You see, although crypto is only ten years old, it has already made a massive impact on the world. Like that other game changer, the internet, we’re finding our feet, scrambling to make things work, finding out what doesn’t and pushing the envelope. Is it actually money? Will people really accept it? Will it really grow in the value in the future? The answer is ‘yes’ for the first two and, in my opinion purely based on maths and economics, ‘yes’ for the third. But in any case, if we just make the assumption that it’s here to stay, we need to mine within the rules that exist.
Every country is gradually laying out its position in terms of cryptocurrency and it varies from downright hostile to welcoming with everything in between. However, one thing that is certain is that governments will want you to pay your tax on your earnings. That’s on top of paying for your mining equipment, power, hosting fees and any other bits and pieces that are inevitably required. How on earth do we work all this out and still make a profit?
Well, the good news is that it’s possible. I should point out that everything I am going through here is from a UK standpoint and that parts of this may not be accurate where you are, although it’s likely most of the principles will apply. The bottom line is, though, if you’re not in the UK, you’ll need to check. No, really, you will.
I’ve been mining for some time and have also owned and run several companies of various formats and sizes over the years (the largest having 23 employees at its peak) After a recent – and very long – meeting with an excellent ‘real world’ accountant, I have been able to put together this basic guide on what we believe is the most tax efficient way of doing it. I like to use what I call a ‘real world’ accountant because, although they’re few and far between, they have a better understanding of everything beyond the numbers. For example, the chap I deal with, and have been dealing with for many years, is a multi millionaire in his own right, with a substantial property portfolio, a number of large scale businesses and a simply uncanny ability to calculate very complex outcomes in his head. He knows business, he knows what’s legal, what isn’t and what the tax man will accept with the correct supporting evidence. He’s a smart lad. I say ‘lad’, he’s 70 now, but still as open minded about new business opportunities as someone half his age.
My own mining operation (still quite small compared to many, but growing slowly as profits are steadily reinvested) is owned not by me, but by one of my companies. Of course, I own the company, but it is separate from me with the benefits (and hassle factor) it comes with. The money I put in is classed as ‘capital’, recorded in the books as a long term loan repayable when certain conditions are met, and all the machines it buys are classed as ‘plant and machinery’ since it’s sole purpose is to generate money for the company.
The hosting and electrical costs, which I pay my chosen partner, CyberianMine, monthly can be settled in traditional fiat or Bitcoin and I flit between the two as it suits the company. Accounting in the books for fiat is simple of course, and for Bitcoin I simply take a screenshot of the equivalent value at the time of the transaction and record it as journal entry in the accounts: debit ‘electricity/hosting costs (whatever you want to call it) and credit a control account set aside to act a virtual bank account since no money comes from the company bank account in real terms at this point. At the end of the accounting year, we’ll use these figures to calculate any tax due as if they were simple fiat transactions. It sounds more complicated than it is, but the truth is any good accountant will know how to do this. All you have to do is keep good records, ie make sure you take screenshots and log down the transaction date and fiat equivalent for everything you do in Bitcoin. Don’f forget to include transaction costs as well, they are a legitimate company expense. If you’re really smart, you’ll log these separately in your accounts.
When buying new machines, the same principle applies, except that we’re going to record them as ‘assets’ rather than operational items. This is important, because it means you can claim depreciation on those assets over time to offset the eventual tax bill. Whether you paid £500 or £3000 for your machine, you’ll be able to depreciate it all the way down to zero over time and claim a portion of that ‘loss’ in value as you would any other depreciating asset. In other words, you’ll get a good portion of that money back. Again, your accountant will do this as long as give him or her the numbers they need. You’ll need to pay him or her of course, but those costs can also be offset.
Of course, your business will need internet, phones, stationery and all the other costs associated with running it, literally anything that you need to keep that operation running and what’s allowable will vary between different company set ups. A limited company will allow you to buy a couple of suits a year, for example, without raising any eyebrows with the taxman. Even certain aspects of laundry, cleaning and teas & coffees for meetings is claimable. It’s all about keeping the receipts and having a business case for claiming it, but even then a few hundred pounds a year of what’s called ‘trivial expenses’ for directors is perfectly acceptable. All of this can be offset against the profits in the future, just check with your accountant.
But don’t be silly or try it on. Putting your speedboat respray through your mining business is probably not going to cut it!
At the end of the year, you’ll have a bunch of money in equipment, which can be depreciated and a new book value attributed to it, some cash in the company account, some ongoing liabilities in terms of hosting fees, some Bitcoin (the value of which will be measured in fiat and entered as an asset) and a bunch of costs associated with producing that Bitcoin. Your tax bill be a combination of all these factors. Don’t be afraid to claim every allowance you’re entitled to and also to explore any tax sheltering schemes you can take advantage of. Tax avoidance is perfectly legal. Tax evasion isn’t.
There’s a whole lot more to this of course, but this blog is designed as a highly simplified introduction, created to do no more than to make you think about how you’re setting up your operation. These are the basics, just get these bits right for now and you’re half way there. Even if you have no idea what I’m talking about for some of the time, just keep all your receipts, keep all the screenshots of fiat values of the transactions you do in crypto and find an accountant later on if you must.
I’ll share more information on how the company owned Bitcoin should be represented, and taxation on profits beyond the normal ‘get Bitcoin at x price and sell at y price.’, ie capital gains beyond production profit later on, but, of course, don’t be afraid to ask if you have a question or two in the meantime.
There’s one more thing I should mention: DON’T try and avoid paying your share of tax. Sure, you might get away with it for a while, but in the end, it’s not worth it. The tax man is smarter than you think, and they’re already on to tracking activities which are, after all, recorded forever on the block chain for everyone to see. I have no doubt this will become routine in due course. Do it legally and play the game by their rules. After all, those very same rules give you plenty of scope for offsetting costs against profits within existing frameworks.
And besides, you’ll sleep far better at night.
Looking to get into mining? I recommend CyberianMine, a company I have partnered with since their inception in early 2018. You can simply buy any number of machines from their shop and start mining easily and simply. Using the exclusive voucher code ‘jason25’ will give you 25 euros off each and every machine that you buy as a bonus.