Crypto currency does not need to be cryptic!

7th June 2023

What exactly is cryptocurrency?

Cryptocurrency (crypto) is a form of decentralised digital currency.  Although there is no central issuing and regulating authority like with traditional currencies like GBP or USD, there are still taxes on crypto in the UK.

Crypto assets like Bitcoin and Ethereum have always been popular with investors and tech enthusiasts, but crypto is attracting the mainstream with hype around tokens like Dogecoin and Shiba, NFTs and the development of Web. Adoption rate is soaring and shows no signs of slowing down. In 2022, a HM Revenue and Customs (HMRC) survey found that 10% of UK individuals now own crypto and the government also announced intentions for the UK to become a global crypto asset hub.

However, regulation is also growing. The 2023 Spring Budget announced that crypto needs to be declared separately to other capital gains on the self-assessment tax return from the 2024/25 tax year onwards. The reduction in the capital gains tax allowance is also likely to hit crypto users hard. In addition, worldwide crypto regulation is growing, with jurisdictions uniting to achieve more tax transparency of crypto assets through the OECD’s Crypto Asset Reporting Framework.

The truth is, cryptocurrency is here to stay, legislation is changing and therefore there is an argument for those who have crypto assets to require additional support and guidance around this relatively new world from a tax perspective.

The devil is in the detail regarding crypto currency transactions and given its growth and sums involved, it is important for individuals to be aware of their tax reporting and payment responsibilities as well as the increased risk of HMRC enquiring into and focusing their resources on this area of evolving taxation, hence why it is strongly advisable for specialist professional advice to be sought to ensure ongoing compliance is maintained.

Is income tax payable on crypto?

The answer is both yes and no.  Not everyone who buys crypto will have to pay income tax on it – but there are some circumstances where income tax will be due and payable, i.e.,

  • An employer pays all or part of a person’s wages in crypto
  • A personal regularly buys and sells crypto to make short-term profits (with reference to the ‘badges of trade’), i.e., a trader
  • An individual mines crypto (i.e., creates new coins) as a business

The income tax rates for crypto are the same as the regular income tax rates.  Bear in mind, if an individual has to pay income tax on crypto assets, national insurance contributions are likely to be payable on such income/profits as well.

Is capital gains tax payable on crypto?

If an individual decides to sell or dispose of their crypto and/or transfer one type of crypto for another, and the profitable gain exceeds the threshold of £6,000 (not accounting for any other taxable gains arising in a tax year of disposal), capital gains tax is likely to be payable on the profit realised.  Capital Gains Tax (CGT) is the most common type of tax arising on crypto since most is held as an investment asset as opposed to a trading activity, although each case needs to be reviewed based on its specific circumstances.

There are a few circumstances where an individual can enjoy their crypto without having to be concerned about CGT:

  • An individual’s profit from sale is below £6,000 in a tax year (or £3,000 from the 2024/25 tax year).
  • An individual is giving/selling their crypto assets to their spouse/civil partner.
  • An individual is donating crypto to a selected registered charity.
  • The proceeds received from such crypto activities are reinvested into subscribing for qualifying shares in SEIS and/or EIS companies within relevant time limits, thus deferring capital gains arising to a later point in time.

An individual will not have to pay CGT on any asset until it is sold or gave away.  Any CGT payable will then be payable to HMRC by 31st January, following the end of the tax year it is disposed of.

This can be done by:

  • Filing a self-assessment tax return.
  • Using the ‘real time’ CGT service.

There are currently two rates for CGT on crypto, which are based upon an individual’s annual taxable income level:

  • 10% is for any gains falling within the basic rate (if total annual taxable income is below £50,270)
  • 20% is for any gains falling within the higher rate (if total annual taxable income is above £50,271)

Is inheritance tax payable on crypto

In short, yes.  HMRC considers crypto to be ‘property’ and constitutes an asset for inheritance tax (IHT) purposes.

So even though you may not physically be able to live inside your crypto coins, if someone passes away and you inherit crypto which exceeds £325,000, it may be subject to inheritance tax, dependent upon available allowances and reliefs available and how assets and a person’s will has been structured.

Typically, an inheritance tax liability will be payable at a flat rate of 40% on the value of the crypto that is over the £325,000 ‘nil rate band’ threshold.

Voluntary and prompted disclosures

At Whitings LLP, we have experience in dealing with making disclosures under HMRC’s ‘Digital Disclosure Service’ online campaign in bringing individual’s tax affairs up to date where they have crypto activities and transactions giving rise to Income and CGT liabilities, with the view of mitigating interest and penalties, where it is appropriate to do so.  Therefore, if you would like an initial no-obligation consultation to discuss any crypto issues, please do not hesitate to get in contact with us.

Disclaimer - All information in this post was correct at time of writing.
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