Understanding the Tax Implications of Cryptocurrency in the UK.
Investments in cryptocurrencies have become more and more popular within recent years, with an estimated 6% of the UK having bought forms of the currency such as BitCoin, Ethereum, Tether and Doge.
With the potential for large amounts of money to be made (and lost) from such investments, this has unsurprisingly drawn the attention of HMRC. It’s currently estimated that up to 95% of cryptocurrency investors are at risk of being non-compliant, meaning that a large number of people are at risk of receiving fines if investigated.
As a result, the tax authorities are actively seeking to encourage non-compliant investors to check their tax position through a series of ‘nudge letters’ targeting those known to have disposed of (the transfer of ownership either through selling, swapping or gifting) crypto assets.
Are you one of the 95% of investors at risk of facing fines? Here’s what you need to know to stay safe.
When Do I Have To Pay Capital Gains Tax on Crypto Returns?
If you sell or exchange your crypto-currency for more than you initially acquired it for, you’ll be deemed to have incurred a ‘Capital Gain’. The profit from this transaction is therefore subject to Capital Gains Tax (CGT).
As of the 24/25 tax year, everyone is entitled to a £3000-a-year tax free allowance. However, it seems highly likely that there will be changes to CGT in the upcoming budget on October 30th, so keep an eye out for how this may bring some changes to the tax landscape.
For investment returns that are above this threshold amount, you’ll be required to pay Capital Gains Tax at the following rates:
- Basic rate taxpayers- 10%
- Higher and additional rate taxpayers- 20%
Will I Have To Pay Income Tax on Cryptocurrency Returns?
For most people who are buying cryptocurrency with the intention of using it as investment for the future, income tax will not apply. You’ll just be required to pay CGT if your profits exceed the tax-free allowance.
Although, if you are actively trading cryptocurrencies (buying and selling to create short term profit) as opposed to simply investing over time, it is possible that HMRC will consider you to be running a business.
One of the main criteria that could deem you a trader is how much time you spend on it. For example: if you are buying, selling, swapping etc crypto most days then this would be considered trading not investing. It would also have to then form a good part of your income for the year, so if you have a full time job that isn’t related to crypto investing, then chances are you wouldn’t be viewed as being a trader.
However, if HMRC does deem you to be a trader, your profits will be subjected to income tax rather than CGT, and you’ll have to register as being self-employed. In this scenario, the income tax due will be dependent on the tax bracket that your income falls under: either 20%, 40% or 45%, plus additional national insurance contributions.
What If I Give Cryptocurrency as a Gift or Inheritance?
If you own cryptocurrencies and want to give them away, either as a gift or as part of your inheritance, you’ll need to be aware of the tax implications.
Gifts of cryptocurrency could incur CGT if the market value of the currency is above the value that it was held at the time of gifting. Any gain in the value of the crypto would therefore be liable for CGT.
For the purpose of inheritance, cryptocurrency is treated as property, and its value at the time of death is included in the deceased person’s estate.
Should I Keep A Record Of My Crypto Investments?
For ease and transparency, it’s best to keep a detailed record of all of your crypto-currency transactions, should HMRC investigate further down the line. It’s recommended that you keep records of the following:
- The date of each transaction
- The amount of cryptocurrency involved
- The value in GBP at the time of the transaction
- Any fees incurred
- The purpose of the transaction (e.g., buying, selling, gifting)
Remember: you must report cryptocurrency gains or income on your self-assessment tax return. Failure to report taxable transactions can lead to penalties should HMRC investigate and discover non-compliance.
What If My Cryptocurrency Investments Were Loss-Making?
If you make a loss on your crypto investments, you are able to offset these losses against your gains for CGT purposes, therefore reducing your taxable amount.
Make sure that these losses are all noted in detail so that you are able to clearly evidence them and legitimately offset them on your tax return.
Cryptocurrency Tax Compliance: Not Something To Ignore
If you’re a cryptocurrency investor, the seriousness of making sure that you stay compliant cannot be underestimated. With HMRC stepping up their efforts to crack down on non-compliance, getting caught out brings with it the risk of a hefty fine.
With everything that is going on in the world right now, the last thing you want is to be worrying about the potential implications of having to deal with an investigation. That's why the best way to settle your nerves, and make sure that you’re staying on the right side of HMRC is to work with a trusted cryptocurrency tax professional that is able to help you navigate the rules with ease and continue trading like a boss.
Schedule a free consultation today here to ensure that you’re fully compliant!
This article was written by Nordens Chartered Accountants where they offer expert advice and assistance with all of your business needs: from your everyday accounting to Advisory, Tax, Audit and more!
For support with any Crypto Tax or accounting services, look no further than Nordens Chartered Accountants. You can contact them by filling out their contact form here to schedule a consultation.
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