As digital currencies become increasingly popular with both individuals and businesses, one must be aware of the tax requirements involved with investing in cryptocurrencies.
In this article, we’ll explain in which circumstances cryptoassets are taxed in the UK.
HMRC’s definition of a cryptocurrency
“ Cryptoassets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be:
- traded electronically “
How cryptoassets are taxed in the UK?
Normally, Cryptocurrency related profits will
be taxed via:
- Capital Gains Tax – Investment (for Individuals)
- Income Tax – Trading (for Individuals)
- Corporation Tax – Trading or investment (for Companies)
Whether your profits are taxed as income or capital gains depends on whether you are trading or investing.
Capital Gains Tax (CGT)
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.
CGT Calculation example
- If you’ve purchased a crypto coin for £10,000, with £500 of allowable costs, and sold it for £30,000, five years later, you have generated a taxable capital gain of £19,500.
- Your allowable CGT will be calculated as follows:
£30,000-£10,000-£500= £19,500 taxable Capital Gain
- From your taxable capital gain, a further £12,300 of CGT allowance (as long as you have no other Capital Gains) will be deducted, reducing your taxable gains to a total of £7200, which will be then taxed according to your Income Tax rate.
Per section 38 of the Taxation of Chargeable Gains Act, these types of allowable costs can be deducted:
- the original cost (in pound sterling) paid for the cryptoasset
- transaction fees paid for having the transaction included on the blockchain
- advertising for a purchaser or a vendor
- professional costs to draw up a contract for the acquisition or disposal of the tokens
- costs of making a calculated avaluation of gains or losses
CGT tax rates
- For personal income that falls within the 20% basic tax rate, an additional CGT of 18% will be applied, while a higher income of £50,271 will be taxed at 28%.
- You do not have to pay CGT if the total profit from selling a single or multiple cryptoassets was below £12,300.
What are disposable assets?
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.
The general rule
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:
• level of organisation
• intention “
- If a company or corporate member of a partnership holds exchange tokens as an investment, they must pay Corporation Tax on any gains realised on disposal.
- If a company realises a capital loss on the disposal of exchange tokens, this can be used to reduce an overall gain on total capital disposals.
- Special rules apply if the loss-making disposal is to a connected person.
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:
- An ‘intangible asset’ for accounting purposes.
- An ‘intangible fixed asset’ that has been created or acquired by a company for use on a continuing basis.
Income Tax and National Insurance
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.
Earnings from employment
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.
Record keeping for tax return purposes
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.
That is why it is crucial to keep a complete record of your cryptocurrency transactions. These records are:
- the type of cryptoasset
- date of transaction
- whether that cryptoasset was bought or sold
- number of units bought or sold
- value of the transaction in GBP
- total of all investment units held
- bank statements and wallet addresses, in case these are needed for an enquiry or review.
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.
We always recommend advising with one of our accountants and reviewing your finances before making a final decision.