Funny the things that get your taxation radar beeping! Like stopping off for breakfast at a local café and talking over tea and a bacon roll, or a conversation in your local pub over a beer.
Those I spoke to both know I used to be a chartered financial planner and both have had success investing in crypto currencies. They wanted to share their successes and the rollercoaster ride of their endeavours.
It got me thinking about tax implications on the gains they made. What would happen if HMRC asked them about it? What would they need to do?
I thought I’d better find out and, having researched and analysed HMRC’s Cryptoassets Manual, I feel confident about sharing a high-level summary of what I discovered.
What are cryptoassets?
There are thousands of different types of cryptoassets out there – or as you might know them, cryptocurrencies. Cryptocurrencies are cryptographically secured digital representations of value or contractual rights that can be:
- transferred
- stored
- traded electronically.
Cryptocurrencies are stored in a virtual wallet accessed through apps or websites. There’s no central bank or government to manage the system or step in if something goes wrong. Every transaction is recorded in a public ledger, or ‘blockchain’, that operates with ‘distributed ledger technology’ (DLT). That is, a digital system that records details of transactions in multiple places at the same time.
HMRC does not treat cryptoassets like money, or consider cryptoassets to be money or currency. Instead, the tax office has grouped cryptoassets into four main categories:
- exchange tokens
- utility tokens
- security tokens, and
- stablecoins.
Exchange tokens, such as bitcoin, are intended to be used as a means of payment but are also becoming increasingly popular as an investment, due to potential increases in value.
Utility tokens provide the holder with access to particular goods or services on a platform, usually using DLT. A business or group of businesses will normally issue the tokens and commit to accepting them as payment for particular goods or services. Utility tokens may also be traded on exchanges or in peer-to-peer transactions.
Security tokens provide the holder with particular rights or interests in a business, such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.
Stablecoins minimise volatility as they may be pegged to something that is considered to have a stable value, such as a fiat currency – government-backed, for example, US dollars – or precious metals such as gold.
How are cryptoassets taxed in the UK?
The tax treatment of all types of tokens depends on the nature and use of the token – not the definition of the token. Anybody who resides in the UK and holds cryptoassets will be taxed on any profits made on them. Profits are liable for capital gains tax (CGT), which means you pay tax on the difference between what your cryptocurrency cost you, and how much you sold it for.
You only have to pay CGT on your overall gains above your tax-free allowance – called the ‘annual exempt amount’. The CGT tax-free allowance for 2021/22 is £12,300.
For example, say you purchased an asset with cryptocurrency for £12,000. You brought that cryptocurrency for £8,000. You’re required to pay either 10% or 20% CGT (depending on your income) on the £4,000 profit unless it is within your tax-free allowance of £12,300.
CGT is due when a disposal has been made and a profit has been made. It will need to be reported on a self-assessment tax return if the total profits exceed £12,300 in this tax year.
Do you pay tax on cryptoassets if you don’t trade them?
No. HMRC is only concerned with the gains you make when the cryptoassets are sold, not the amount you have invested. If there’s been no disposal there’s no tax due. If you’ve exchanged one type of cryptocurrency for another, that’s considered a disposal and would be subject to CGT.
HMRC receives information from crypto exchanges and sends letters to individuals they know have traded in cryptoassets. These are known as ‘nudge letters’.
Do you have to pay income tax on cryptoassets?
There’ll be some circumstances where HMRC may consider that buying and selling cryptoassets constitutes ‘trading’, and therefore as a form of generating income. For UK tax purposes, profits from a trade will be subject to income tax (up to 45% depending on your income), not CGT.
Cryptocurrency ‘mining’ and ‘staking’ may potentially be subject to income tax, but this is rare.
How can you plan for tax payments on cryptoassets?
Cryptoasset exchanges may only keep records of transactions for a short period, so you need to keep your own records, which must include:
- the type of cryptoasset
- date of the transaction
- if they were bought or sold
- number of units involved
- value of the transaction in pound sterling (as at the date of the transaction)
- cumulative total of the investment units held
- bank statements and wallet addresses, in case these are needed for an enquiry or review
- costs incurred in undertaking the transactions.
When a person calculates their gains/losses from the disposal of tokens, not all costs are allowable as a deduction.
The HMRC Cryptoassets Manual outlines the types of costs which can be deducted, such as:
- the consideration in pounds sterling originally paid for the asset
- transaction fees paid for having the transaction included on the distributed ledger
- 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 valuation or apportionment to be able to calculate gains or losses.
Record keeping is key here and your clients may need your professional advice if they’re likely to face a CGT liability on their cryptoassets.
All of the above makes me think the next time I’m in the café or my local, my two cryptoasset friends may not necessarily enjoy the conversation. But at least I’ll be able to help them understand the tax implications of their success of investing.
