In recent months, we have seen an increase in individuals investing in Cryptocurrencies (or cryptoassets). The increase and tax complications involved in relation to these assets has given rise to specific guidance given by HMRC on their tax treatment. We set out below some issues you need to consider and where you may need further help from a tax advisor like Price Bailey.
What are they?
Cryptocurrencies are a digital currency and are typically built upon a technology called blockchain (which is effectively a decentralised ledger of all the transaction across a peer-to-peer network). Bitcoin and Ethereum are two better known examples, but many different tokens exist.
The decentralised nature of Cryptocurrencies is one of their defining factors, no central bank or government authority controls its distribution, as with traditional currencies. Cryptocurrencies can be used to pay for goods or services, to invest, or simply to exchange funds with someone else, much the same as traditional currency. They were originally intended to act as a means of payment but are being used increasingly as a speculative investment asset.
In a similar sense to foreign exchange markets, Cryptocurrencies can be bought/sold on a variety of online exchanges which allow investors to:
- exchange their fiat (government backed) currency for a particular token;
- exchange tokens for other tokens; and/or
- convert tokens into fiat currency
The blockchain network underpinning many cryptocurrencies relies upon the peers (i.e. users) of that network to verify all of the transactions that take place. These transactions are split up into blocks and distributed to 'miners', who verify the transactions by solving a cryptographic hash (a puzzle that is solved by the miners using computer hardware). The miners are rewarded for their audit work through the distribution of the cryptocurrency relating to that particular blockchain. This is how the supply of cryptocurrencies increase.
UK tax treatment
For UK tax purposes, crypto assets are usually subject to capital gains tax for individuals who hold them as personal investments on any profit realised. There are also instances if an individual is seen to be "trading", "mining" or as part of an employment remuneration package then any profit could be assessable to income tax.
If there has been no disposal of the Cryptocurrencies there is not usually any tax due as you only pay taxes in the UK on realised profits.
A disposal for UK tax purposed may occur if Cryptocurrencies are sold for cash, used to buy other assets with a value or exchanged for another Cryptocurrency. For example if an individual has exchanged a token from one platform to another platform (i.e Bitcoin to Ethereum) this would be a disposal for UK capital gains tax purposes and a re-purchase at the market value at that date of the new token.
It should also be noted that receiving a cryptocurrency in payment for goods or services sold by your business requires you to bring the value of the cryptocurrency into your sales/turnover and the same value forms the purchase cost of that cryptocurrency for a future sale of it.
UK resident and domiciled individuals have a tax-free annual exemption of £12,300 during the current 2021-22 tax year, which could be used to reduce Capital Gains Tax owed. Capital gains will then be taxed at either 10 or 20 per cent, depending on the level of your other taxable income.
Special rules (referred to as "Bed and Breakfasting" rules) apply for selling and buying the same Cryptocurrency within 30 days.
The UK tax year covers the period 6 April to 5 April each year, and any taxes due via self-assessment are due by the following 31 January.
You need to be careful when calculating the profits/losses arising from the disposal of Cryptocurrencies. HMRC receives information from crypto exchanges and will pursue those who fail to report their profits correctly. Penalties for failure to report gains can be quite severe.
Examples of the types of costs which can be deducted in calculating the profit or losses include the following:
- Transaction fees paid for having the transaction included on the distributed ledger;
- Exchange fees to acquire or dispose tokens for sterling;
UK Tax returns
For many individuals the disposal of Cryptocurrencies may have indirect consequences such as needing to register for self-assessment and report the profit realised.
There is a requirement for any UK resident individual who realises capital gains over the UK annual exemption (£12,300, or where the value is more than £49,200 currently for 2021/22, or if there is foreign income over £300) to report this to HMRC.
Individuals will need to report the gain on their Self-Assessment return and the tax will be due on the 31 January following the end of the tax year. For 2021/22 tax year ending 5 April 2022, any tax liability will be due by 31 January 2023.
Capital losses can also be claimed in writing and usually have a four year time limit.
If you are not registered for Self-Assessment, you will need to register for Self-Assessment by 5 October following the end of the tax year and file your tax return by the 31 January following the end of the tax year in which the disposal took place and pay the taxes to HMRC.
Alternatively, you can use the 'real time' Capital Gains Tax Service immediately to report your gain by 31 December in the tax year after you made the gain. For example, if you made a gain in 2020/21 tax year, you need to report it by 31 December 2021. HMRC will send you a letter with the payment reference number and details of how to make payment.
In terms of being able to calculate any potential gains or loss this can be problematic.
- Cryptocurrencies are subject to major price volatility in the market and this can result in significant gains or losses. Also large numbers of transactions are likely to be undertaken each tax year which can prove difficult to keep records of accurately.
- In addition cryptocurrency exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual comes to evaluate the position. Therefore we advise that records start to be saved by investors as soon as possible. We would recommend that if there are likely to be a number of transactions, a spreadsheet be kept showing the purchases and sales.
- UK tax rules also dictate that specific ordering rules apply to tokens purchased and sold within the same token across multiple wallets via a pooling method. For example an individual may have multiple wallets across separate trading platforms and containing the same token (e.g. Bitcoin) would need to be calculated together to work out any potential profit/loss on disposals.
- Also the tokens need to be converted into GBP sterling (as most are priced in US dollars) at the time of each transaction (i.e. purchase or sale) and their market value needs to be ascertained.
In summary, individuals must therefore keep a record of the following:
- the type of crypto asset
- date of the transaction
- if they were bought, sold or exchanged
- number of units involved
- value of the transaction in pound sterling (this is the market value in GBP at the date of the transaction)
- the cumulative total of the investment units held as well as the cumulative cost.
- bank statements and wallet addresses, in case these are needed for an enquiry or review.
These are records that should also be kept and produced in an event of an enquiry. They form part of the audit trail from acquisition to disposal and therefore evidence of any gains/ losses made.
There are added complications for those individuals who are not UK domiciled as the situs of most cryptocurrencies is a complex area. sector. Currently where a cryptoasset is an asset distinct from any underlying asset then HMRC determined its situs by the residency of the beneficial owner. Therefore if UK resident this would be the UK. It should be noted that for non-domiciled individuals, the fact that the exchange on which the cryptocurrency is traded possibly overseas does not make the gain an overseas gain to which the remittance basis may apply under current guidance.
However, these rules are still evolving and we are aware that professional bodies are still discussing this point. We would advise that professional advice is taken.
This summary discusses the taxation of Cryptocurrencies for individuals only. If a business or company is involved with Cryptocurrencies the tax treatment is complex and we advise that specialist advice is obtained.
Tax treatment of any transaction involving the use of cryptocurrencies needs to be looked at on a case-by-case basis considering the specific facts and circumstances. The cryptocurrency market is a fast-moving one and HMRC are alive to the fact that their use is becoming more prominent, both in terms of their use as a fiat currency replacement and as a speculative asset. Price Bailey is well-placed to advise on their impact to your own tax situation and invite you to discuss further.
Originally Published 10 August 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.