Cryptoassets and the investment and trading of Cryptocurrency has increased dramatically in recent years. There is often confusion around how these investments are taxed and what the UK tax guidance states. Is your return from these investments taxable? The following article is an overview of the situation and sets out the rules to help ensure that your tax return is submitted correctly.
Cryptoassets and Cryptocurrency – How are they taxed?
It is hardly surprising, given the amount of press attention Bitcoin has received over recent years that there is now a heightened interest in cryptoassets. However, it is important to understand how these assets are regarded under UK tax legislation and the reporting obligations that may arise for the investor.
Cryptoassets are, largely, untraceable and whilst HM Revenue & Customs (HMRC) authority to obtain information directly from cryptoasset exchanges and platforms has increased, HMRC have very little power to obtain details of these assets held by individuals. Under the UK self-assessment tax return system, it is the taxpayer’s responsibility to “self-assess” and notify HMRC of any liabilities arising on their income and capital gains. With strict penalties and interest for non-compliance, spending a little bit of time now to understand the rules could save you running into problems in future.
What are Cryptoassets?
Cryptoassets are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically. They are not considered currency or money by HMRC. The main types of cryptoasset include:
- Exchange tokens – typically used as a means of payment and more recently, as an investment (e.g. bitcoin)
- Utility tokens – these provide the holder with access to goods or services on a platform
- Security tokens – these provide the holder with particular rights in a business
- Stablecoins – coins pegged to another asset with a stable value
Whilst the definitions are useful to label the different tokens you may hold; the tax treatment depends on the use of each token.
What tax do I need to pay?
HMRC published their cryptoassets manual in March 2021 setting out their position on these assets. Generally, their view is that an individual is liable to capital gains tax on any gain arising on the disposal of cryptoassets which exceeds an individual’s tax-free annual exemption. If there is tax to pay, and in certain cases even where there is no tax to pay, the gain will need to be reported on the individual’s self-assessment tax return which should be submitted to HMRC by 31 January following the end of the tax year in which the gain arises. Alternatively, the gain can be reported using HMRC’s Capital Gains Tax real time service. This will apply in most cases.
Where an individual’s activities in buying and selling cryptoassets are deemed to be trading as part of a business, any profit arising from the trade is subject to income tax, and not capital gains tax. The activity will generally be considered trading where the frequency, level of organisation and sophistication are such that the activity amounts to a trade. Generally, HMRC will resist most attempts to class any investment activity as a trade and therefore advice should always be sought in this area.
What about any losses I make?
Capital losses from cryptoassets can be offset against other capital gains made during the same tax year or carried forward to offset against capital gains made in future tax years. Capital losses must be claimed within four years of the end of the tax year in which the capital loss was realised.
If your cryptoassets are treated under the income tax rules and treated as a trading business, any losses which arise can either be offset against future profits from your trade or offset against other income. If the profit from your activity is treated as miscellaneous income, any losses can normally be carried forward to later years to offset against future profit from the same activity.
How do I work out the gain on a transaction?
You will need to calculate the gain for each separate transaction. The gain is normally the difference between what you paid for the asset and its sale price however if you acquired the cryptoasset over a period of time on different dates, you would need to work out the pool cost.
You may be able to deduct certain allowable costs such as transaction fees, as well as your tax-free annual exemption to the extent it has not already been offset against other gains made during the same tax year. Unused capital losses either arising in the same tax year or brought forward from earlier tax years can also be offset against any gain.
Can investing in cryptoassets be treated as gambling and therefore exempt from capital gains tax?
In short, no. HMRC does not consider the buying and selling of cryptoassets to be the same as gambling.
Can I donate cryptoassets to charity?
Absolutely. As long as your donation does not earn you any benefit in return, donating your cryptoassets to charity will mean you do not pay capital gains tax on the donated value.
My employer has offered to give me cryptoassets as part of my remuneration package. Should I be taxed on this?
Cryptoassets received as employment income are subject to income tax and National Insurance based on the value of the asset you receive.
Will cryptoassets form part of my estate for Inheritance Tax?
Potentially. Depending on your domicile status and the situs of the assets, their value may form part of your UK estate on your death.
What should I do if I haven’t reported everything I should to HMRC?
It is always preferable to make a voluntary disclosure to HMRC rather than wait for HMRC to find out about the inaccuracy in your tax affairs. Voluntary disclosure will often result in lower penalties and may reduce the number of years you are required to disclose. If you believe you may have reporting obligations relating to past liabilities, please contact us and we will discuss the next steps and guide you through the process.
Should I be keeping records?
Yes! It can feel as though we have to deal with an enormous amount of paperwork nowadays, however it is more important than ever to retain records to support your UK tax position. If HMRC carry out a compliance check on your tax affairs, it is likely that they will ask to see a copy of your records.
The onus is on you as the taxpayer to keep your own records for each cryptoasset transaction.
If you have invested in cryptoassets or are dealing in cryptocurrency and would like our advice on the tax position, whether you have any reporting obligations with HMRC or any other queries regarding your assets, please get in touch.
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