The popularity of cryptocurrency has exploded over recent years with many jumping onto the bandwagon in the hope of making a quick profit. Being a comparatively new form of asset, there’s a misconception that they’re a form of tax-free gambling. However, this is simply not the case. Like any form of asset, the purchase and sale of cryptocurrencies can create various personal tax implications that you should be aware of.
HMRC doesn’t consider cryptocurrency to be legal tender and has identified three types of crypto assets:
Exchange tokens: These are intended to be used as a method of payment and cover most cryptocurrencies such as Bitcoin. The value of the tokens exist as a means of exchange or investment and, unlike utility or security tokens, they don’t provide any rights or access to goods or services.
Utility tokens: These give the holder access to specific goods or services. A business will normally issue the tokens and commit to accepting them as payment for the goods or services in question. Utiility tokens issued by Golem are one example.
Security tokens: These provide the holder with a particular interest in a business, for example a debt due by the business or a share of profits in the business. Polymatch is one such supplier of security tokens.
Depending on the nature of trading cryptocurrency, the profits generated may attract Capital Gains Tax (CGT), or in some circumstances, Income Tax and National Insurance (NI).
Capital Gains Tax
The buying and selling of cryptocurrency would normally be considered an investment as opposed to trading. A disposal for CGT purposes includes the following:
Selling cryptocurrency for a profit or loss;
Selling one type of cryptocurrency for another, eg selling Bitcoin and purchasing Ethereum[C2] ;
Using cryptocurrency to pay for goods or services; and
Gifting cryptocurrency to another person.
In order to calculate a potential CGT liability, you must convert the value of your cryptocurrency to Pounds Sterling, using the relevant exchange rate at the date of disposal and keep a record of your calculation. Certain costs are allowable against tax, including the purchase cost of the asset, transaction fees and any valuation costs.
If you realise a gain on the transaction, you may be liable to CGT on the amount above the Annual Exemption (currently £12,300). CGT is chargeable at either 10% or 20% dependent on whether you are a basic-rate or higher-rate taxpayer.
A realised loss on the sale of a cryptocurrency investment can be used to reduce your capital gains in either the current or future tax years. However, you must report the capital loss to HMRC in order for it to be allowable. You must claim the loss within four years following the end of the tax year in which the loss was realised, ie a loss in the tax year ended 5 April 2021 must be claimed by 5 April 2025.
Income Tax and NI
In a number of circumstances, you may be liable to Income Tax and NI on your crypto assets which is determined by a number of factors.
If you’re buying and selling cryptocurrency through day trading, ie multiple transactions on a daily basis, HMRC may consider your activities as ‘trading’ and you could be liable to Income Tax and National Insurance on the profits.
When determining if a trade is taking place, HMRC will likely draw upon existing case law on trading in shares and securities. While there’s no set limit of transactions which may amount to a ‘trade’, the average individual is unlikely to be affected by this. If your activities do amount to trading, any realised trading losses may be available to offset against other income received in the year. In addition, if you receive cryptocurrency as a form of employment pay, you may be liable to Income Tax and NI on the amounts received.
Cryptocurrency mining has become increasingly popular over the past few years. Mining uses computers to solve complex maths puzzles in order to generate cryptocurrencies. The level of mining may not be sufficient to be considered a trade by HMRC; however, any cryptocurrency awarded through mining will be taxable as income with any appropriate expenses reducing the amount chargeable to Income Tax. What’s more, if the mined cryptocurrency is kept, their future disposal may be liable to CGT.
Further points to consider
Non-domiciled individuals – When calculating your tax liability on the remittance basis you should treat income and/or profits of cryptocurrency as UK source income. HMRC considers that while you’re a UK resident, the exchange tokens you hold as a beneficial owner are located in the UK.
Inheritance Tax – HMRC views cryptocurrency as ‘property’ for Inheritance Tax purposes, which means it will form part of your estate on death.
If you have a company, you would be liable to corporation tax on any gains or trading activity undertaken.
The rules regarding the taxation of cryptocurrency can be complex. If you’re unsure of the UK tax treatment of your cryptocurrency, it’s important you seek appropriate tax advice. Please feel free to reach out to us for further information.