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.
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