New Bitcoins come in to circulation through the process of ‘mining’. Mining involves running a program on a high-powered computer to solve a mathematical problem. When the problem is solved a new set of Bitcoins are produced and shared between the miners.
It’s straightforward to start mining your own Bitcoins – all you need to do is run a freely available mining application on your computer. However, this is not a fast-track to endless financial rewards.
The mathematical problems involved in mining Bitcoins are extremely complex. To solve them requires a large amount of computing power and in a cruel twist of fate every additional Bitcoin is more complex than the last, and thus becomes more difficult to mine.
In an attempt to mine coins efficiently, many of our clients are investing their company’s surplus profits in specialist high-powered Bitcoin mining computers, known as ‘rigs’.
Taxation when buying a Bitcoin mining rig
Investing in a Bitcoin mining rig through your company is like investing in any other asset: tax relief is available in the form of capital allowances. This means that the purchase of a Bitcoin mining hardware can be used to reduce your Corporation Tax bill – every £1,000 you spend on hardware reduces your Corporation Tax by £200.
However, operating a Bitcoin rig isn’t so straightforward. High-powered computers consume large amounts of electricity and the cost of this energy needs to be considered for taxation purposes. Therefore, once you’ve purchased your hardware you need to decide who will cover the running costs of the rig: you or your company.
Running your mining rig personally
You can cover the running costs personally by operating the rig at home using your domestic electricity supply. In this instance your electricity costs must be paid for personally, and cannot be claimed back via your limited company. The upside is that mined Bitcoins are yours to keep.
However, in order to operate in this way you must account for the fact that you’re using a company asset for personal benefit. You have two choices: either pay your company a reasonable fee to hire the Bitcoin rig, or declare the benefit on your P11D to ensure the benefit is taxed appropriately. Failure to do so would be treated as tax evasion.
Running your mining rig through your limited company
Another method of running your Bitcoin mining rig is to operate it entirely within your limited company. This means your company will pay the electricity costs and the mined Bitcoins become a company-held asset.
Given the high cost of mining rigs there may be an immediate benefit for companies using the Flat Rate VAT scheme. If you spend more than £2,000 (including VAT) on a single purchase of hardware then you can claim the VAT back in its entirety. The stipulation of claiming this VAT back is that you’re not planning on hiring out the rig or using it primarily for personal use.
But the more challenging aspect of operating a Bitcoin rig within your company is the treatment of VAT on electricity. That’s because electricity for domestic / personal use attracts VAT of 5%. However, VAT on electricity for business use (including Bitcoin mining by your company) is charged at 20% – even if it’s supplied by your domestic supplier.
Business owners generally don’t worry about this as HMRC take a pragmatic approach. They state that domestic electricity used for business purposes will attract the lower rate of VAT as long as:
- No more than 40% of your domestic energy supply is used for business purposes, and,
- No more than 1,000kWh per month is consumed at the lower rate (‘de minimis’)
Once you exceed this threshold it’s your responsibility to contact your energy company so they charge VAT correctly. You’ll need to complete a certificate with a precise percentage of how much electricity is used for business purposes. They’ll then charge the full rate of VAT on your business usage. It’s up to you to notify your energy company as failure to do so may result in a fine. As a double blow, if you’re using the Flat Rate Scheme you’re not entitled to fully claim for this additional charge.
Finally remember that Bitcoins mined in this way are company-owned assets and must be treated as such. This means that you’ll need to account for gains (or losses) and you can’t simply transfer ownership to yourself without accounting for personal taxes. Find out more about your personal and business tax position in our Bitcoin Tax Guide for UK businesses.
Choosing the right approach
As you can see, deciding on how to operate your Bitcoin mining rig is not necessarily straightforward. For a complete picture you need to consider:
- Your personal tax and earnings position
- Your company’s VAT scheme, and flat rate percentage
- The purchase cost of your rig
- The energy consumption of the rig
- Your domestic energy consumption
Then also remember that the true business case for mining Bitcoins is a constantly moving target. That’s because the next coin you mine will invariably be more complex and more costly to mine than the last.