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It is estimated that more than 3 million people in the UK currently own a cryptocurrency. Since 2008, over 9 million Brits were engaged in purchasing crypto coins.
As digital currencies become increasingly popular with both individuals and businesses, one must be aware of the tax requirements involved with investing in cryptocurrencies.
“ Cryptoassets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be:
Normally, Cryptocurrency related profits will
be taxed via:
Whether your profits are taxed as income or capital gains depends on whether you are trading or investing.
Applies to profits made by individual investors rather than organisational ones, who have disposed of their cryptoassets. As with other types of Capital Gain, you’ll be taxed only for the gain made from the disposal of a cryptoasset, less any associated costs.
Capital Gains Tax allowance will then be deducted from the remaining value, to produce a net profit subject to tax as a capital gain.
Disposing of a cryptocurrency asset may refer to selling it, swapping or transferring it to someone else and getting compensated for it.
Companies and businesses which are involved in buying, selling, mining or providing goods and services in exchange for cryptocurrency, will normally (but not always – see ‘trading’ below) be required to declare their crypto profits or losses through Corporation Tax.
Corporation Tax applies the same general rule to cryptoasset profits and gains made by a limited company. It is declared on a Corporation Tax Return (called a CT600) which is submitted to HMRC within 12 months of the year-end of the company.
Cryptocurrency activities that are in higher velocity will usually be classed as ‘organisational trading’ by HMRC and as such, be liable for Corporation Tax.
Whether the buying and selling of exchange tokens amounts to a trade depends on a range of factors known as ‘badges of trade’ including:
• frequency
• level of organisation
• intention “
Companies that account for exchange tokens as Intangible assets may be taxed under the Corporation Tax rules for intangible fixed assets, if the token is both:
There are a few scenarios where cryptoassets will be liable for Income Tax. The below two are normally the most common ones for individuals.
When Individuals buy and sell Cryptocurrencies at a significant scale, the activity can be classed as trading. A series of tests known as ‘The Badges of Trade’ can be used to determine whether trade applies.
If so, any profits from this activity will be subject to income tax at an individual’s marginal rates (20%, 40% and 45%). Additionally, Class 2 and 4 National Insurance will also be due at the current rates.
In circumstances where an employee receives ‘money worth’ payments in a form of cryptocurrency, that income would be subjected to Income Tax and National Insurance deductions, depending on the actual value of each cryptoasset.
Cryptocurrency mining is an activity that involves resolving complex mathematical problems, in order to generate new crypto tokens. Normally, ‘miners’ will be awarded crypto tokens for their work.
In cases where ‘Mining’ isn’t being classed as ‘trading’, reworded tokens will be taxed as Income Tax (Miscellaneous Income) or Capital Gains, once you decide to sell or transfer your cryptoassets.
Individuals who incurred losses through their cryptocurrency investment could further reduce their tax liability by declaring these losses on their Self-Assessment tax return.
Cryptocurrency platforms (i.e. cryptoassets exchange) will regularly keep your transaction records for a relatively short period of time. Furthermore, some of these exchange services will terminate their operation by the time your tax return is due.
In this article, we have reviewed some common requirements with regard to cryptocurrency their tax liabilities. However, your personal circumstances may vary and require specific advice. Furthermore, there are many more factors that could change your tax position for better or worse.
Please advise with an accountant and review all the available financial options, before making a final decision.
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