20 things you should know about cryptocurrency and tax

Are you thinking about investing in cryptocurrency? Maybe you already have, as have about 2.3m others in the UK with cryptocurrency holdings, which are sometimes called crypto assets or just crypto. Bitcoin is the world’s best-known example.…

5 Minute Read

Last Updated: 25th March 2022   |   Created: 14th December 2021

Are you thinking about investing in cryptocurrency? Maybe you already have, as have about 2.3m others in the UK with cryptocurrency holdings, which are sometimes called crypto assets or just crypto. Bitcoin is the world’s best-known example. More than 60% of UK cryptocurrency investors have invested in Bitcoin, which launched in 2009, but other popular options include Ethereum, Litecoin and Ripple.

  • Cryptocurrencies are digital assets. You can’t buy things on the high street with them and they have no inherent value. Their value is determined by whatever someone is prepared to pay for them.
  • Cryptocurrencies are bought and sold via a peer-to-peer online networks/exchanges. And because their value can go up or down, you can make or lose money when you sell cryptocurrencies.
  • A “crypto token” is a denomination of a particular cryptocurrency. They have differing values.

SO, THAT’S THE BASICS OUT OF THE WAY. WHAT OTHER KEY FACTS SHOULD YOU KNOW ABOUT CRYPTOCURRENCY AND TAX?

1. Although the word “crypto” means secret or concealed, there’s nothing illegal about owning and trading in cryptocurrencies – as long as you pay any tax due. 2. HMRC does not consider crypto assets to be currency or money. And, as it explains: “The tax treatment of all types of cryptocurrency depends on its nature and use – its definition. 3. People buy cryptocurrencies hoping that their value will go up over time. That’s why Capital Gains Tax is payable if you dispose of cryptocurrency tokens by:

  • selling them
  • exchanging them for other crypto assets
  • using them to pay for good or services
  • giving them away (unless it’s to your spouse or partner) or
  • donating them to charity.

4. The gain is usually the difference between what you bought and sold the cryptocurrency tokens for. If you were given them, to work out your gain, you’ll need to find out the market value when they came into your possession. 5. After your total taxable gains go over the Capital Gains Tax tax-free allowance threshold (£12,300 for the 2021/22 and 2022/23 tax years), you’ll be taxed as follows:

  • If you’re a basic rate Income Tax payer (ie with taxable earnings of £12,571-£50,270 a year) you’ll pay Capital Gains Tax of 10%, then 20% on gains that take you above the £50,270 earnings threshold.
  • If you’re a higher or additional rate Income Tax payer (ie with taxable earnings of more than £50,270 a year) you’ll pay 20% CGT on your crypto gains, once you go over the CGT threshold.

6. To check if you need to pay Capital Gains Tax, you must calculate your gain for eachof your transactions (the rules are different if you sell tokens within 30 days of buying them). 7. Some allowable expenses are deductible for Capital Gains Tax. According to HMRC, allowable expenses can include:

  • “transaction fees paid before the transaction is added to a blockchain”
  • “advertising for a buyer or seller”
  • “drawing up a contract for the transaction”
  • “making a valuation so you can work out your gain for that transaction.”

8. According to government website GOV.uk, deductible allowable costs can also include “a proportion of the pooled cost of your tokens when working out your gain”. 9. You can also use capital losses to reduce your gain, as long as you first report to HMRC. 10. To report and pay Capital Gains Tax on cryptocurrency you can:

  • complete a Self Assessment tax return at the end of the tax year or
  • use the real-time Capital Gains Tax service to report it straight away.

11. You must keep separate records for each cryptocurrency transaction detailing:

  • token type
  • date of your disposal
  • number of tokens disposed of
  • tokens remaining
  • value of the tokens in pound sterling
  • bank statements and wallet addresses
  • a record of the pooled costs before and after you disposed of them.

12. HMRC can ask to see your cryptocurrency records if it decides to carry out a compliance check.

13. You must pay Income Tax and National Insurance contributions (NICs) on crypto assets if you receive them from an employer as a non-cash bonus/benefit/payment. This could apply if you’re employed and self-employed (ie you also freelance/operate as a sole trader).

14. If HMRC believes you’re trading in cryptocurrencies rather than occasionally investing, you’ll need to pay Income Tax rather than Capital Gains Tax.

15. There can also be Stamp Duty, Inheritance Tax and pension contribution implications. If you need to pay Income Tax in this way, you’ll need to register for Self Assessment, if you haven’t already done so.

16. You do not need to pay Capital Gains Tax on the value of the cryptocurrency upon which you’ve already paid Income Tax, but you will still need to pay CGT on the gain you make afteryou’ve received them if you then dispose of them.

17. Many crypto assets are traded on exchanges that don’t use pounds sterling. In such cases, the value of any gain or loss must be converted into pounds when completing your Self-Assessment tax return.

18. According to GOV.uk: “Generally, for Income Tax or Corporation Tax, profits from a trade involving crypto assets must be calculated in accordance with Generally Accepted Accounting Practice, subject to any adjustment required or authorised by law.”

19. Failure to disclose to HMRC cryptocurrency gains could result in paying tax, interest and costly penalties. Those found guilty of deliberate tax evasion could also face criminal charges and a custodial sentence.

20. You can visit government website GOV.uk to download HMRC’s Crypto assets Manual, which explains taxation of crypto assets in much greater detail.

GoSimpleTax offers you an easier way to complete and file your Self Assessment tax return. And to ensure that your tax return is error-free and that you’re paying no more tax than necessary, why not get your Self Assessment tax return checked by one of our experts?

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.

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