Director Cryptocurrencies Tax UK – What You Need To Know

Tony Dhanjal

Cryptocurrencies Tax UK

This Article Contains

The meteoric rise of this entirely new asset class has been driven largely by retail investors (private individuals) who see cryptocurrency as the investment opportunity of a lifetime. Equally there are those who believe cryptocurrencies won’t stand the test of time. Whichever side of the fence you sit on it’s clear that as it stands there are many people out there generating an income/profits by investing in or trading various cryptocurrencies. This poses the question of how are cryptocurrencies currently being taxed in the UK. In todays article we will explore the basics of cryptocurrencies tax UK and explain the responsibilities that investors have.

What Is A Cryptocurrency?

Most people would tell you that cryptocurrencies are a form of digital money or currency but unfortunately that is not currently the view of HMRC who commissioned their “cryptoasset taskforce” to report on this new asset class. Their conclusion was that cryptoassets (cryptocurrencies) are neither currency nor money for UK tax purposes. Their official definition of cryptocurrency is:

“Cryptoassets (or cryptocurrencies as they are also known) are cryptographically secured digital representations of value or contractual rights that can be:

  • transferred
  • stored
  • traded electronically
While all cryptoassets use some form of distributed ledger technology (DLT) not all applications of DLT involve cryptoassets.”
 
HMRC identify 3 types of cryptoasset:
 
  1. Exchange tokens – which are intended to be used as a form of payment. There is no one person group or asset underpinning them. The value exists based on it’s use as a means of exchange or investment. Unlike utility or security tokens they do not provide any rights or access to goods or services.
  2. Utility tokens – which provide the holder with access to particular goods or services on a platform. A business or a group of businesses will normally issue the tokens and commit to accepting the tokens as a payment for the particular goods or services in question.
  3. Security tokens – which may provide the holder with particular interests in a business. For example in the nature of debt due by the business or a share of profits in the business.
In todays article we will be focusing on the rules for exchange tokens which is the category that the popular cryptocurrency bitcoin falls into. The cryptocurrencies tax UK rules for utility tokens and security tokens will use the same starting principles but the final tax treatment may differ. It is also important to remember that this asset class is still in an adolescent stage so the tax treatment is under constant review and can change very quickly.
 

Is Investing In Crypto Considered Gambling?

This is an important classification and one that many investors would have been hoping for as profits from gambling activities are exempt from tax in the UK. A similar classification was made for some types of forex trading and as many people consider cryptoassets a form of currency they were looking for similar treatment. Unfortunately the cryptocurrencies tax UK rules do not view investments in cryptocurrencies as gambling activities which means that any profits would be taxable but the question is how are those profits taxed?

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Cryptocurrencies Tax UK – For Individuals

If you are a private individual investing in cryptocurrency then it is highly likely that any profits you make will be taxed as a capital gain which is currently preferable to income tax rules. Under capital gains tax rules an individual can make £12,300 (2020/21 capital gains allowance) without paying any tax. This is in addition to your personal allowance which cannot be utilised against the capital gain itself but can be used in addition to. This means you could potentially earn £12,500 (2020/21 personal allowance) from employment and make £12,300 capital gains without paying any tax. If you exceed the capital gains allowance then you will be initially be taxed at 10% until you have utilised the full basic rate band and then 20% once you exceed this. Which tax band you belong to will depend on your other sources of income in the tax year.

HMRC also recognise that there will be rare circumstances where an individual may be trading cryptocurrencies as a business but point out that this would be very rare. In these rare circumstances HMRC would actually tax you under income tax rules. This is unlikely to be favourable for the individual as firstly you wouldn’t have access to the separate capital gains allowance (in this case you can use your personal allowance of £12,300 but this is might already be utilised by other income sources). 

You would also be taxed at 20% for basic rate tax payers, 40% for higher rate tax payers and 45% for additional rate tax payers. If you thought that was comparatively bad enough, it doesn’t stop there. As this would be considered trading income you may also need to pay national insurance. This would come in the form of class 2 and class 4 NI. Class 2 NI is payable weekly at a rate of £3.05 per week if your profits exceed £6,475 and class 4 is collected via the self assessment process payable at a rate of 9% on profits between £9,501 and £50,000 and then at a reduced rate of 2% on profits over this amount.

The above are the two possibilities that individuals face under cryptocurrencies tax UK rules but it is clear from HMRC’s wording in their detailed guidance that the vast vast majority of cryptocurrency investors and users will be taxed under the capital tax regime.

Cryptocurrencies Tax UK – Calculating The Gain/Loss

You will need to calculate the gain/loss whenever there is a disposal of cryptocurrency. This would include:

  • selling the cryptocurrency for money
  • exchanging one cryptocurrency for another type
  • using crypto assets to pay for goods or services
  • giving away cryptocurrency to another person who isn’t your spouse or civil partner

In most cases when an individual donates their cryptocurrency to charity they will not need to pay capital gains tax. Most cryptocurrencies are priced with a USD equivalent and will therefore need to be converted to GBP using a suitable exchange rate (you should keep a record or rates used).

Once you have established there was a disposal you will need to deduct any allowable costs from the proceeds. The following are examples of costs that are allowable:
 
  • the consideration originally paid for the asset (converted to GBP if necessary)
  • transaction fees paid before the transaction is added to a blockchain
  • advertising for a purchaser or vendor
  • professional costs to draw up a contract for the acquisition or disposal of the cryptoasset
  • costs of making a valuation or apportionment to be able to calculate capital gains or losses
 You are not allowed to deduct any costs deducted against profits for income tax or associated costs of mining activities such as electricity and equipment. When calculating the cost of acquisition you should pool all purchases of the same cryptocurrency and use an average cost much like you would when selling shares in a company. You must also observe similar “bed and breakfasting” rules meaning any cryptocurrency of the same class that you buy the same day or in the 30 days following disposal will actually be used to calculate your acquisition price instead of assets in the pool. The cryptocurrencies tax UK rules are currently very similar in treatment to investing in shares of a company.

Example

Alan purchases 1 bitcoin on 1st January 2020 for £10,000 and another 2 on 6th June 2020 for £20,000 each. He then sells 2 bitcoin on 17th July 2020 for a total of £50,000 before buying another bitcoin on 20th July 2020 for £24,000.

The disposal proceeds are simply £50,000 but to calculate the acquisition cost he must first consider any acquisitions made the same day or in the 30 days following the disposal. This means that the acquisition cost of 1 of the coins disposed of will be £24,000 relating to the purchase made on 20th July 2020. The acquisition cost of the second coin will be calculated by pooling the other purchases. (1 x £10,000 + 2 x £20,000 / 3 = £16,667). This gives Alan a total acquisition cost of £40,667 and a gain of £9,333 which will be subject to capital gains tax.

Mining Cryptocurrencies

Some miners will obtain cryptocurrencies as a reward for verifying additions to the blockchain digital ledger. Crypto mining typically involves solving difficult maths problems with a computer to generate new cryptoassets. 

Again how this reward is taxed will depend on whether the individual is mining as a trade. If you read HMRC’s detailed guidance on cryptoassets this appears to be very unlikely but would be judged on a case by case basis. It would take more than an individual with a professional setup to be considered trading. HMRC would have to see substantial operations and a business like setup. This means that again the vast majority will not be considered trading and the pound sterling value of the reward at the time of issue would be taxable as miscellaneous income. The individual may be able to utilise the £1,000 trading allowance which can be deducted from the value of the reward to reduce the tax bill. The trading allowance is usually available to use against either self employed income or other income but HMRC’s guidance is still very vague so it’s best to confirm this with them on an individual basis. Alternatively if the trading allowance cannot be utilised the miner will be able to deduct associated costs of mining before paying tax on the reward.

If you were in the rare situation where your mining activity constitutes a trade, your reward would be taxable as income and subjected to income tax and national insurance.

Record Keeping

It is the responsibility of the individual to maintain sufficient accounting records to support their cryptocurrency transactions in accordance with cryptocurrencies tax UK rules. Your records should include:

  • the type of cryptoasset
  • date of the transaction
  • if they were bought or sold
  • number of units
  • value of the transaction in pound sterling
  • cumulative total of investment units held
  • bank statements and wallet addresses, if needed for an enquiry or review
  • details of exchange rate used to convert back to pound sterling
As any gains or losses from cryptocurrency will be reported on the self assessment you will need to maintain these records for at least 5 years following the 31 January submission deadline. It is also important to remember that although some cryptocurrency platforms and exchanges will maintain records, they may not maintain those records for a sufficient duration of time and the ultimate responsibility lies with the individual to comply with cryptocurrencies tax UK rules on record keeping.
 

Residency Status and Cryptocurrency Tax UK

Cryptocurrencies tax UK rules may also depend on your residency status. Usually UK residents are taxed on their worldwide income. Non residents who hold assets such as property in the UK are only taxed on their UK income. As cryptocurrencies are intangible assets (they don’t take a physical form) HMRC are currently adopting an approach of taxing based on residency rather than the location of an asset which is difficult to determine for cryptocurrencies (although they have considered other approaches such as location of the crypto wallet).

This is particularly important for a number of reasons:

  1.  Residents – Cannot shield their crytocurrencies from tax by holding the crypto wallets in another country.
  2. Non residents will not be subject to UK tax on cryptocurrency transactions just because their crypto wallet is based in the UK.
To check your residency status you can use HMRC’s statutory residency test.
 

How To Report A Gain

An individual will usually report any gain arising from their crytocurrency investing or trading via a self assessment tax return by completing the capital gains section along with any sections relevant to other sources of income. Even in the rare circumstance that HMRC consider your cryptocurrency activity to be a trade you would still report via the self assessment but would complete the self employment section instead. The deadline for the self assessment is the 31 January following the end of the tax year in question. For more information on when you might need to complete a self assessment check out our article do you need to complete and register for self assessment?

Watch our in-depth video on Cryptocurrency and assets

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Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."

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