How to Make Money with Cryptocurrency

 

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Making Money with Bitcoin in the UK: A Comprehensive Guide

 

The crypto boom, spearheaded primarily by Bitcoin, has undeniably opened new avenues for wealth generation, making it more accessible than ever for individuals to engage with digital assets. This guide will walk you through various strategies for earning income with Bitcoin and other cryptocurrencies, alongside essential insights into how cryptocurrency is treated for tax purposes in the UK.

 

What is Cryptocurrency?

 

Cryptocurrency is a digital or virtual currency that can be used for purchasing goods and services, but more commonly, it is traded as a commodity.¹ While Bitcoin is the most widely recognised, the market boasts over 10,000 different cryptocurrencies, with popular alternatives including Ethereum and Tether.

 

The core of cryptocurrency relies on blockchain technology and is secured by cryptography, making it highly resistant to counterfeiting.² This decentralised technology manages and records transactions across a network of computers, offering enhanced levels of security and transparency.³ A significant part of crypto’s appeal stems from its decentralised nature, meaning it operates without the direct control of any central government or traditional bank.⁴

 

Through sophisticated encryption technology, cryptocurrencies can regulate the creation of new currency units and verify transactions securely.⁵ When considering “how to make money off of Bitcoin,” it’s vital to grasp its commodity aspect and how its price fluctuations can be leveraged for profit.

 

 

Can You Make Money with Bitcoin in the UK?

 

The question “Can I make money with Bitcoin, or is it just a fad?” is common among newcomers. The answer is a resounding yes. While stories of “overnight millionaires” exist, it’s crucial to approach the crypto market with a realistic understanding of its volatility.

Bitcoin is renowned for its extreme price fluctuations, which can see its value surge by hundreds or even thousands of pounds within hours—a level of volatility rarely seen in traditional assets like stocks, bonds, or physical commodities.⁶ Conversely, its price can also plunge dramatically, leading to significant losses. This inherent volatility is a key consideration when strategising how to make money by trading Bitcoin.

 

 

How to Make Money with Cryptocurrency (UK Focus)

 

The primary method for generating income with cryptocurrency is through trading. However, successfully navigating Bitcoin trading is far from simple; it’s a high-risk investment with specific tax implications that you must understand.

Assuming you’ve prepared for the risks, here are some common strategies employed by crypto enthusiasts, with particular attention to how they apply in the UK context:

1. Buy and Hold (HODLing)

This is by far the most common and straightforward method. You purchase Bitcoin (or other cryptocurrencies) and hold onto it with the expectation that its market price will increase over time. This strategy requires patience, as you might need to hold your assets for years if the market enters a prolonged downturn.

UK Tax Implications:

• No Tax on Purchase/Holding: Buying Bitcoin with GBP and simply holding it does not trigger a tax event in the UK.
• Capital Gains Tax (CGT): When you eventually sell your Bitcoin for GBP, exchange it for another cryptocurrency, or use it to purchase goods/services, you are disposing of the asset.⁷ If you make a profit (the disposal value is higher than your cost base), this profit is subject to Capital Gains Tax (CGT).⁸ You get an annual tax-free allowance for CGT (currently £3,000 for 2024/2025).⁹ Gains above this are taxed at either 10% or 20% (for residential property, it’s 18% or 24%), depending on your overall income tax band.

   

2. Earn Crypto Dividends

While not universally available for major coins like Bitcoin or Ethereum, certain cryptocurrencies allow you to earn dividends simply by holding them, similar to traditional stock dividends. Examples might include NEO (which generates GAS), KuCoin Shares (KCS), or VeChain (VTHO).¹⁰

 

UK Tax Implications:

• Income Tax: Dividends received in the form of additional tokens are generally treated as Income Taxable in the UK, based on their GBP value at the time of receipt. This income would be added to your total income for the tax year.
• Capital Gains Tax (CGT): If you later sell these dividend tokens for a profit, they would also be subject to CGT.

3. Run a Masternode

For those with a more technical inclination and substantial capital, operating a masternode can be a rewarding venture. Masternodes play a crucial role in maintaining real-time records on native blockchains, verifying new blocks of cryptocurrency exchanges and transactions.¹¹ Unlike regular nodes, they often don’t have to submit their new blocks for verification. Masternodes typically operate on a collateral-based system, requiring the operator to hold a significant amount of the cryptocurrency.¹² This collateral incentivises honest behaviour, as the operator has a vested interest in the coin’s stability and value.

 

Running a masternode can be technically challenging but offers a compelling way to earn passive income, as masternode operators are typically rewarded with cryptocurrency for their infrastructure work.

UK Tax Implications:

• Income Tax: Rewards received from running a masternode are generally treated as Income Taxable in the UK, based on their GBP value at the time of receipt. If the activity is considered a trade (i.e., very organised, regular, and with a view to profit), National Insurance Contributions (NICs) might also apply.
• Capital Gains Tax (CGT): The initial collateral locked in the masternode remains subject to CGT if its value changes when it is eventually disposed of. Any earned rewards, when subsequently sold, would also be subject to CGT.

4. Day Trading

Cryptocurrency day trading mirrors traditional day trading, involving frequent buying and selling within short timeframes (often the same day) to profit from small price movements.¹³ This demands strong analytical skills and close market monitoring. Due to Bitcoin’s high volatility, crypto day trading can be even more challenging, and many individuals may incur losses. Popular day trading strategies include:

 

• Range Trading: Focusing on “overbought” and “oversold” zones to identify potential reversal points.
• Scalping: Aiming for small profits from a large volume of trades, often using automated bots to enter and exit positions rapidly.

UK Tax Implications:

• Capital Gains Tax (CGT) vs. Income Tax: For most individual investors, short-term gains from day trading are typically subject to CGT. However, if your crypto trading activity is deemed by HMRC to be “highly organised, frequent, and sophisticated” with a clear intention to profit, it could be classified as a trading business. In such exceptional cases, profits would be subject to Income Tax and potentially National Insurance Contributions, which are often higher than CGT rates.
• Record Keeping: Meticulous record-keeping of every transaction (date, time, value in GBP, quantity, fees) is crucial for accurate tax reporting.

5. Arbitrage

Due to the decentralised and often unregulated nature of the crypto market, significant price discrepancies can exist between different exchanges. Arbitrage involves exploiting these differences by buying cryptocurrency on one exchange where it’s cheaper and immediately selling it on another exchange where it commands a higher price, skimming the difference.¹⁴ The lack of universal regulation means exchanges set their own prices, leading to variations in asset liquidity and trading volume that create these arbitrage opportunities.

 

Arbitrage is a more advanced strategy that requires rapid execution and careful consideration of transaction fees across different platforms.¹⁵

 

UK Tax Implications:

• Capital Gains Tax (CGT) or Income Tax: Similar to day trading, the tax treatment of arbitrage depends on HMRC’s view of your activity. For casual, infrequent arbitrage, profits are likely subject to CGT. However, if you conduct frequent, highly organised arbitrage activities with a clear profit motive, HMRC might classify it as a trading business, leading to Income Tax and potentially National Insurance Contributions.
• Complex Calculations: Tracking basis costs across multiple exchanges for various transactions can be highly complex for tax purposes.

 

Cryptocurrency and Tax Accounting in the UK: Rules and Regulations

 

It is crucial to understand that HMRC does not consider cryptoassets to be currency or money for tax purposes in the UK. Instead, they are generally treated as property or assets.¹⁶ This means that various crypto-related activities can trigger tax liabilities.

 

Here are situations where earning, selling, or using cryptocurrency may be taxable in the UK:

• Selling Cryptocurrency for Fiat (e.g., GBP): This is a disposal event, and any profit is subject to CGT.¹⁷

   

• Trading One Cryptocurrency for Another: This is also a disposal event for the crypto you are selling, and any profit on that disposal is subject to CGT.
• Using Cryptocurrency to Buy Goods or Services: This is considered a disposal of the cryptocurrency, and any profit on its value since acquisition is subject to CGT.
• Receiving Cryptocurrency as Wages or Payment for Services: This is generally treated as Income Taxable based on its GBP value at the time of receipt.¹⁸ If it’s employment income, PAYE will apply. If it’s for self-employment, you’d report it via Self Assessment and potentially pay NICs.

   

• Earning Income from Mining or Staking: As discussed, rewards from these activities are typically subject to Income Tax.
• Receiving “Dividends” from Crypto: As mentioned above, these are generally treated as Income Taxable.

Key Tax Allowances and Rates (for 2024/2025 tax year, subject to change):

• Personal Allowance (Income Tax): Up to £12,570 of income is tax-free. This allowance reduces for incomes above £100,000.
• Trading and Property Allowance: A £1,000 tax-free allowance for miscellaneous income or trading income.¹⁹

   

• Capital Gains Annual Exempt Amount: £3,000 of capital gains are tax-free.²⁰

   

• Income Tax Rates: 20% (Basic Rate), 40% (Higher Rate), 45% (Additional Rate), depending on your total taxable income.
• Capital Gains Tax Rates: 10% or 20% for basic and higher/additional rate taxpayers respectively (for assets other than residential property).

Reporting to HMRC:

If you have tax to pay on your crypto activities, you will typically need to report this via a Self Assessment tax return. Detailed records of all transactions (dates, amounts, GBP value at the time of transaction, purpose) are essential. HMRC provides specific guidance and updated forms for reporting cryptoassets.21

 

Common Cryptocurrency Mistakes to Avoid (UK Context)

 

Investing in crypto carries significant risks, and it’s essential to approach it with caution. While stories of rapid wealth creation exist, they are not representative of every investor’s experience. Engaging with a financial advisor and a tax specialist knowledgeable in crypto can be highly beneficial.

Approach crypto investment similarly to any other high-risk asset, and strive to avoid these common pitfalls:

• Assuming crypto is a “get-rich-quick” scheme: It is not. Sustained success requires research, patience, and risk management.
• Dismissing the risk of a dramatic market crash: Bitcoin and other cryptocurrencies are highly volatile and can experience severe price drops.²²

   

• Failing to research the coins you’re investing in: Understand the technology, team, use case, and market sentiment behind any cryptoasset before investing.
• Not understanding how it all works: Before diving into complex strategies like day trading or running masternodes, ensure you have a solid grasp of the underlying principles and risks.
• Investing most of your portfolio into crypto: Crypto should always be considered a high-risk asset, akin to penny stocks. Its enormous potential returns come with equally substantial risks.
• Neglecting UK Tax Implications: Failing to keep meticulous records and accurately report your crypto activities to HMRC can lead to penalties, fines, and interest charges.²³

   

The bulk of your investment portfolio should ideally remain in more reliable and less volatile options, such as diversified stocks, bonds, and ETFs.

 

Conclusion

 

Cryptocurrency, particularly Bitcoin, presents substantial opportunities for potential financial growth.²⁴ However, before actively engaging in strategies to make money with Bitcoin in the UK, it is highly advisable to consult with a qualified financial advisor and a tax specialist. They can provide personalised guidance on managing your finances, assessing risk tolerance, and ensuring full compliance with HMRC’s evolving tax regulations concerning cryptoassets.