Cryptocurrency has recently skyrocketed in popularity as more and more people started to invest during the COVID-19 pandemic. Despite HMRC recently releasing an update to its guidance for filing taxes on cryptocurrency, there still remains some confusion about how you can be taxed. That’s why we’ve created this handy guide to help clear things up.
A Quick Refresh: What is Cryptocurrency?
Cryptoassets, tokens or cryptocurrency are cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically. In simpler terms, cryptocurrency is a type of electronic cash that is generally held as investments due to their ability to rise and fall in value. A cryptocurrency is a type of digital money created from code.
Despite the name, HMRC doesn’t consider cryptoassets or cryptocurrency to be money or currency and have instead categorised them into four main groups. These are:
Exchange tokens are intended to be used as a method of payment and are becoming a popular way of investing due to the potential they hold to rise in value. You may have heard of ‘bitcoin’ which is the most well-known exchange token.
Utility tokens grant the holder access to certain goods or services on a platform. Businesses or groups usually issue the tokens and commit to accepting them as payment for certain goods or services. Additionally, utility tokens can be traded on exchanges or in peer-to-peer transactions in the same way as exchange tokens.
Security tokens grant the holder with particular rights or interests in a business e.g. ownership, repayment of a specific sum of money or entitlement to a share in future profits.
Stablecoins minimise volatility as they are considered to have a stable value such as fiat currency (government backed) or precious metals like gold.
Do I Need to Pay Tax On My Crypto Gains?
In short, yes. In HMRC’s guidance document, they cover exchange tokens and clearly state that profits from buying and selling Bitcoin as well as any other cryptoasssets are subject to tax. Also note that any exchanges of cryptoassets for fiat money or one cryptoasset for another cryptoasset are both taxable events.
Any individuals in the UK who are buying and selling cyrptoassets are most likely to be subject to Capital Gains Tax (CGT) on any gains made, however, you only have to pay capital gains on overall gains above the annual exempt amount, which is currently £12,300 (accurate as of 21 July 2021).
It’s worth noting that according to HMRC, any capital losses from cryptocurrency can be considered for tax liability and can be deducted to reduce the overall capital gain.
For the few who are considered to be cryptocurrency traders by buying and selling at a high frequency, they may have to pay Income Tax on any profits made as trading income, however, HMRC will only do this in exceptional cases as they do not expect individuals to buy and sell crypto assets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade.
For individuals who receive crypoassets as payment for employment, they will have to consider Income Tax and National Insurance Contributions (NIC) as they would with cash payments.
How Do I Pay Tax On My Crypto Gains?
As with any tax paid on profits, you’ll need to submit a tax return in order to declare your income to HMRC. Thankfully, the process is relatively straightforward, all you need to do is:
- Ensure you register for Self Assessment by 5th October 2021.
- Keep accurate records of your trading profits and expenses throughout the tax year.
- Calculate the tax you owe as soon as possible in order to prepare for the bill
- Pay the tax you owe by 31st January 2022.
Make sure that all of your trading records are as accurate as possible as many UK crypto exchanges/platforms share their information directly with HMRC, so failing to disclose all of your transactions will likely result in a compliance check from HMRC and you could end up facing fines or penalties.
Tax Planning with Ryans
In order to make sure you’re fully tax compliant when it comes to your crypoasset trading, you may wish to consider seeking professional advice from an accountant such as Ryans Chartered Accountants. For more advice on taxes and cryptoassets, get in touch with our friendly team today who will be more than happy to answer any questions you may have.