Ethereum Mining and Tax Implications in UK

In 2013, a man names Vitalik Buterin was looking at a line-up of science fiction elements. Then, a particular word seemed to sound more interesting than the rest. It captured his interest since it contained another word “Ether” that he fancied. This word was Ethereum, and this man become the founder of a blockchain-based platform, as well as a high-potential cryptocurrency. Moving forward, Ethereum has the largest market cap ($35,199,137,095) of all cryptocurrencies, second only to Bitcoin ($43,280,307,102). But unlike Bitcoin , Ethereum not only works as a currency, the Ethereum blockchain is inherently programmatic; you can run “smart contracts” that have asset-like properties and execute all sorts of operations, including the full automation of a fund a supply chain, or an organisation. Yet, before we get carried away, we are going to cover a few basics about Ethereum and its impact in the future of cryptocurrencies.

What is Ethereum?

Ethereum, based on blockchain technology, is an open platform that grants the authority to build over a Dapp; or otherwise known as a decentralised application, to developers. With a harsh rate value of 3 TeraHash; or 3,010 HG per second, it has a large infrastructure. Its developers, led by Vitalik Buterin, designed it for high-end GPUs (graphic processing units).

And since it runs on blockchain networks, it also comes with the advantages of decentralised networks such as:

• % downtime, or the inability of apps to be switched off or go down.
• Security, or the protection against fraudulent activities.
• Immutability, or the inability of a 3rd part to modify data

Initially, the Etheruem platform’s distribution was done via a public blockchain network – in an ICO (Initial Coin Offering) form. During which, about

Tax Implications of Ethereum

Ethereum is taxed just like any other cryptocurrency (like Bitcoin being taxed under HMRC ) is being taxed in UK. Owing to these digital currencies uniqueness, they cannot be stocked under the same umbrella of investment activity or any means of payment. However, there are certain taxes which are applicable on Ethereum.

For example if Ben purchases Ethereum and if its value increases, then as per HMRC’s latest rule the increase in value will be liable to Capital Gains Tax . However, capital gains tax will only be realised when Ben converts in into any other currency, like pound or sterling. Capital Gains Tax is currently at 10 per cent or 20 per cent depending or a mixture of both depending on Ben’s other income.

Ethereum and VAT

Before HMRC’s brief in 09/2014, crypto currencies were viewed as vouchers and were therefore subject to VAT . The recent guidelines states that-

• income received from Ethereum mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.
• income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of ‘transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments’

Ethereum and Other Taxes

• On Ethereum, normal corporation taxes on foreign exchange and loan relationships are applicable. The Ethereum will also be taxable under general Corporation Tax rules when the profit and losses of a business are entered into company’s transactions.
• Ethereum transactions will be taxed under normal IT rules when the profit and losses of a non-incorporated business are entered into company’s transactions.
• Ethereum transactions are allowable for normal CGT if the profit and loss incurred are accrued to an individual but only when the profit and loss on a currency contract is not within trading profits.

Although one can check how cryptocurrencies are taxed in UK, however, it is always advisable to visit an accountant specializing in such taxation rules.

Ethereum Features

Ethereum comes with a number of notable features that make it ideal platform for developers.

Ethereum User Accounts

In the Ethereum platform, a blockchain features blocks of various sizes. Alongside, there are various types of user accounts that come with 20-byte addresses.

There are two types of accounts:

• External accounts: accounts with private keys
• Contract accounts: accounts with contract keys

The primary difference between the two types of accounts is in the authority that controls them. For external accounts, the control is assigned to human users, which consequently pass control to external accounts.

On the other hand, contract accounts are not controlled by human users. Rather, these accounts are controlled by internal; codes. While they can use contract accounts, humans would need external accounts to activate contract accounts.

Furthermore, contracts accounts are allowed to perform an operation if instructed by external accounts. So, unless prompted by external accounts. These contracts accounts cannot perform native operations.

Smart Contracts Functionality

The Ethereum platform’s notable feature is the use of scripting functionality called Smart Contracts. This enabled users to create tokens that are compatible with exchanges and wallets under a standard coin API. More importantly, this means that it is able to facilitate the exchange of valuable like money, stocks and property.

Therefore, with Smart Contracts, you can expect a self-operating program that executes orders automatically once conditions are met. Since their operations are done via a blockchain network, they execute according to the original programming without the concerns of downtime, censorship and 3rd party interfaces.

Here is an overview of a Smart Contract’s operations:

• First, a code is written into the blockchain network. Despite the contract serving as the public ledger, this code is written with the protection of anonymity of the involved parties.
• The, a Smart Contract is executed once a trigger is hit.
• Lastly, since a Smart Contract was run, regulators begin inspecting market activity by using the blockchain technology. However, throughout the inspection, regulators are obliged to ensure privacy of the involved parties.

Buying and Using Ethereum

Buying Ethereum through an Online Exchange

The most convenient and cheapest way to get Ethereum is to buy it. This can be done by opening an account on the chosen exchange, adding a payment method going to click buy or sell and select the amount of Ethereum you desire and them clicking to buy Ethereum. The buying process is practically identical to bitcoin you have to register to an online exchange, purchase Ether with the required currently and then transfer it to your Ethereum wallet for safe keeping.

Here are two exchanges that can be used to safely hold money:

• Poloniex: A US based exchange that trade Ether for bitcoins and offers state-of-the-art protection for its tools and for its customers.
• Kracken: The first to change to pass a cryptographically verifiable proof-of-reserves audit and received the highest security ranking for the data storage solution.

Ethereum Wallets

Its is highly recommended that you create a dedicated Ether wallet before you exchange any funds, that way you can quickly transfer your Ethers from the centralised server to the safety of the wallet. What follows are the top two Ether wallets today.

• My Ether Wallet: In accordance with the official description, my Ether wallet is an open source JavaScript client-site tool for generating Ether wallet and sending transactions. It was created as an answer to some problems that users were experiencing with the Ethereum client. The source code is freely available on GitHub to anyone who wants to get a peek. They also have a Chrome extension in beta now, that store all your data in Chrome storage this is the same place Chrome saves your passwords. The private key is encrypted, you can simply generate a wallet and transfer funds from your exchange to the address.
• The official Ethereum Wallet: The official Ethereum wallet is still under heavy programming development and new updates are being frequently released to testers who are not afraid of encountering a bug or two. It provides a convenient graphical user interface to common functions.

Other Methods

Another option is to mine Ethereum: Mining Ethereum use as proof of work it’s similar to bitcoin mining is a sense that there is a diminishing block reward for every block mined. You can try mining Ethereum using your own computer which would be CPU mining, but it will probably not get you too far. However, if you have a dedicated GPU setup for the task, then you can get some real rewards.

Ether and Ethereum in general are destructive technologies that are set to change how the Internet works, whether it succeeds of not, that remains to be seem, for now you can easily get your share of the internet’s future.

Risks of Investing in Ethereum

Just like an investment with other cryptocurrencies in other blockchain platforms , a top disadvantage of investing in the Ethereum platform is the risk of centralisation. The purpose of distributed cryptocurrencies gets defeated. Since large amounts of Ether are held by certain entities like The Decentralised Autonomous Organisation (DAO) Hacker. There are risks that these two entities will join forces and begin disregarding Ethereum’s decentralised system.

Should these two entities join forces while the Ethereum platform is still under toe PoW blockchain. This would mean that these large stockholders can tremendously influence Ethereum’s operations, and affect other network participants. With their authority and extensive control, these large stockholders can create rules and oblige other network participants to adhere to such rules.

On the other hand, the Ethereum platform is shifting to the PoS blockchain. Under the PoS blockchain, the aforementioned security threat is eliminated since the rule of PoS states that 51% of the stock should be acquired by an entity before changes can be declared. While it seems acceptable, the scenario is virtually impossible. Acquiring 51% of Ether would mean buying 51% of all Ether, which can sum up to almost USD $5,000,000,000. And even if a said entity is willing to put in that amount, the scenario is virtually impossible in relation to Ethereum’s limited amount of circulation.

Other Risks Associated with Ethereum

• Unless 100% necessary, relying on the Ethereum platform solely for critical apps is not recommended.
• Ethereum does not provide a stable source when it comes to value.

The Future of Ethereum

If you are doubtful of Ethereum’s capability of leading you towards a promising financial state, perhaps, its best to hear the advice of experts in digital currencies.

One prominent digital currency expert has acknowledged the potential of the Ethereum platform. He said that, just like other cryptocurrencies, Ether can open massive opportunities for difference financial groups. And unlike other cryptocurrencies, a striking advantage that the Ethereum platform has is its optimization especially for developers and software engineers. In addition, he goes on the state that Ether is a hit mainly since many developers and software engineers adopted Ethereum. These people are also willing to anticipate witnessing it progress.

For instance, if you remember the market crash in June 2017. From USD $319, Ether fell to USD $0.10. This consequently resulted to many Ethereum traders losing a big sum of money. But within seconds, the crash was rectified, and Ether’s price rebounded. This resulted in many Fortune 500 companies like JP Morgan, Microsoft, Samsung and Intel that are now exploring the possibilities of Ethereum. Apart from these Fortune 500 companies, many research groups and blockchain start-ups believe in Ethereum as well. These communities have united to form the EEA or Enterprise Ethereum Alliance.

By May of 2017, the EEA has 116 members. They include:

• Cornell University Research Group
• Merck KGaA
• Toyota Research Institute
• Banco Santander
• Accenture

Final Words

The biggest impact of Ethereum may lie in the fact that while it addresses fast growing sharing economies, it continues to accommodate the traditional economic system. So, while it caters to the users who prefer more modern approaches to furthering entrepreneurial ventures, it does not ignore the characteristics of traditional economies. More importantly, the incorporation of both the modern approaches and the traditional economies makes Ethereum ideal for both the younger and the older generations. So, an individual regardless of where he/she is rapidly keeping up or still old fashioned, can leverage the Ethereum platform for their entrepreneurial goals.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.