Tax on Cryptocurrency does not have to be cryptic

15th June 2021

Within the last 10 years the cryptocurrency scene has exploded from the first decentralised cryptocurrency, Bitcoin, being created back in 2009 to now more than 4,000 different cryptocurrencies being in existence with a total market cap value of over £1trillion.

 

This has led to the creation of the Cryptoassets Taskforce which was announced back in March 2018 to help set out the UK’s policy and regulatory approach to crytpoassets. Whether you have been part of the cryptocurrency scene for a while now or are looking to buy your first cryptocurrency it is important to know the tax implications that can arise from trading cryptocurrency.

 

Capital Gains Tax Aspect –

Cryptocurrency is classed as a digital asset by HMRC and not a currency, meaning it is taxed under the capital gains tax rules in most cases. Any sale/disposal of cryptocurrencies is classed as a taxable event, this includes trading types of cryptocurrency into other forms of cryptocurrency and using it to pay for goods or services. Cryptocurrency can be gifted to others if you wish, however this will be treated as a disposal and a taxable event with the value being the price on the day the gift was made.

 

If you lose access to your cryptoassets by losing your public or private keys this does not count as a disposal event, however HMRC state that a negligible value claim can be made if the individual can show there is no prospect of recovering the private key or accessing the tokens. If HMRC accepts the claim, the individual will be treated as having disposed of and re-acquiring the tokens they cannot access so that they can crystallise a loss. Sadly, if you have your cryptocurrency stolen from you HMRC does not consider this to be a disposal event, this means a victim of theft cannot claim a loss for capital gains tax.

 

Cryptocurrency is also subject to some of the same rules as trading shares such as the same day rule and the bed and breakfasting rule. They are subject to the same capital gains tax allowance of physical assets of £12,300 as at the date of this blog, and it is worth noting that a tax-free transfer of your crypto can be made to your spouse to make use of their £12,300 capital gains tax allowance if not being used.

 

Business Income Tax Aspect –

HMRC have stated individuals are unlikely to be seen as a trading business and only in some very exceptional circumstances would they believe an individual trading cryptocurrency to be classed as trading for the purpose of tax. It is likely that HMRC will review each case on a case-by-case basis as no standardised rules are in place at this time. If an individual’s activity is deemed to be trading then Income Tax would take priority over Capital Gains Tax and will apply to profits/losses made.

 

End –

Cryptocurrency is still in its early days with Bitcoin, the first decentralised cryptocurrency, only being 12 years old to date. The future will surely be interesting seeing how cryptocurrency impacts our society and if any changes are made in the way it is treated for tax purposes as more and more tax authorities around the world are beginning to pay attention to crypto.

If you wish to read any more on the topic, HMRC have a cryptocurrency manual available for viewing at https://www.gov.uk/government/publications/tax-on-cryptoassets

Other items in Blogs
Harriet Sim
22nd October 2021 Self Assessment late payment penalties

HMRC are now issuing six month late payment penalty notices, as the due date for 2019/20 tax payments was over seven months ago (includes consideration to the additional months extension as a result of the pandemic). Taxpayers facing financial difficulties due to the impact of COVID-19 may have entered into a time to pay arrangement…

Nick Edgley
21st October 2021 Holiday lettings – declare to HMRC

If you own a UK holiday let are you declaring your rental profits to HMRC? If not time may be running out to make a voluntary disclosure of past profits.   HMRC has the power to request information, or documents, from third parties such as holiday booking sites; as well as being able to search…

Keri John
20th October 2021 Xero – Assigning Bills to Customers

You can now assign bills to customers in Xero!   This makes it easier to allocate expenses occurred during a job to the correct customer.   Perfect for Estate Agents, event planners and more.   When creating a bill to pay onto Xero there is an option to ‘assign the bill to a customer’. You…

Jake Day
20th October 2021 Minimising Your IHT Exposure

As Benjamin Franklin once said; the only two certainties in life are death and taxes. Although it’s a sombre subject, it is important to put in place the right planning so that when we are hit by one, we can avoid the other. We want to ensure we are able to leave as much of…

Paul Jefferson
19th October 2021 VAT Registration

A business must compulsorily register for VAT if taxable 12 month turnover exceeds £85,000. They can voluntarily register for VAT as soon as they start trading, providing they expect to make taxable supplies in the future.   Businesses that provide to other businesses may choose to register for VAT voluntarily before the registration threshold is…

Sharon Mace
13th October 2021 VAT DIY Scheme: HMRC update list of allowable expenses

There has been some controversy on claims made on DIY building schemes. HMRC have updated their guidance on goods and services that can be claimed under the VAT DIY Housebuilders’ Scheme.   The list is extensive and gives an ABC of items that are allowed, from Agas to woodworm treatment – but there’s a catch,…