During the past few years, the number of businesses and individuals looking to invest in cryptocurrencies and tokens (HMRC refers to these as cryptoassets) has skyrocketed, with well-known individuals such as Elon Musk regularly promoting these.
Whilst not much is known about these, and they remain relatively new, there are stories of people making huge amounts of money from cryptoassets, but these can be very volatile investments, so caution when investing is key.
Do you have to pay tax on cryptocurrency?
The area of tax is still developing around cryptocurrency and tokens, but HMRC recently published a manual in March 2021, aiming to assist those invested, or thinking of investing into cryptoassets in understanding their tax obligations when making investments into cryptocurrency and tokens.
The General View From HMRC
HMRC does not consider cryptoassets to be currency or money, therefore they do not follow the same tax rules as normal currency or money.
The taxation of cryptocurrency and tokens can depend on the individual circumstances surrounding a transaction, rather than the definition of the asset itself. There are a number of different cryptocurrencies and tokens that can have differing consequences in tax.
Income Tax vs Capital Gains Tax
Due to the volatility of the cryptoassets market, individuals have tried to argue that the buying and selling of cryptocurrency and tokens is gambling, which would entitle an individual to a tax exemption for any winnings/profit made on the buying and selling of these assets.
HMRC have confirmed that, in their view, this is not gambling in the same way that investing in the stock market is not gambling, therefore no exemption is available, and tax will need to be paid on gains and income received from cryptoassets.
Cryptocurrency and Capital Gains Tax
Individuals invest in cryptoassets to hopefully make a profit. Normally a gain on an investment such as shares, would see any gain/profit taxable under the Capital Gains Tax (CGT) rules.
Gains are then taxed at 10/20%, and losses made can be offset against these gains. Therefore, it is preferential for the gains to be taxed under the CGT rules as opposed to the higher income tax rates.
It is also worth noting that any tokens received through airdrops or forks will also be subject to tax, either under the CGT rules or income tax.
Do Income Tax and NI rules apply to crypto?
Income tax and national insurance contributions can apply to an individual in certain situations. For example, if an employee receives cryptoassets from their employers, then income tax rules and national insurance would apply to their acquisition.
However, where cryptoassets are received from airdrops, transaction confirmations and most importantly mining, income tax is likely to be applicable although the basis of the tax charge is likely to depend on the circumstances surrounding an individual transaction.
Carrying on a trade
A key issue here is where an individual could be classed as carrying on a trade. Even though HMRC have confirmed that it would be unusual for an individual to carry on a trade, they do say that it would depend on the particular circumstances surrounding an individual.
If an individual is held to be carrying on a trade, then the trading income rules would apply. The badges of trade would need to be considered and factors that could indicate a trade would be things such as frequency of trading and the amount of organisation when making sales and purchases.
For example, an individual having a room full of computers mining 24/7 in their house could be seen as trading, whereas an individual making one trade per month is unlikely to be classed as a trade.
If an individual is not regarded as carrying on a trade, then assets may be taxable as miscellaneous income on receipt.
Although it is unlikely that an individual will be held to be carrying out a trade, this still needs to be considered when buying and selling, as the difference in taxation could be very costly.
Costs/Expenses with cryptocurrency and tokens
As with the sale of shares, there are a number of ways that an individual can minimise their tax burden by good planning.
- Exemptions - Make use of the availability of the annual exemption (which allows for £12,300 of gains to be made before having to pay any tax)
- Offset losses – If you have made losses in the year, these can be offset against gains in the year which can be used to reduce the overall gain
- Negligible value claims – Where a cryptoasset has become worthless or defunct then you can make a claim, the effect of which allows you to write off losses against other gains
- Keeping a record of costs associated with purchases and sales – keeping track of the costs to purchase the asset, exchange fees, transaction fees, etc. can all be allowable costs when working out a gain, so it is imperative that detailed records are kept.
Reporting on Cryptoassets
If the CGT rules apply, then the gains and losses on the cryptoassets will need to be reported on the capital gains disposals page of a self-assessment tax return.
If you are not currently preparing self-assessment tax returns, then you will want to consider whether one needs to be filed following the investment into cryptoassets. As above gains and losses can be offset against each other, and an individual can make use of their annual exemption.
Should the income tax rules apply then gains are classed as trading profits and both income tax and national insurance will apply.
A tax return reporting on the income received needs to be submitted and all tax paid by the year following 31st January in which the income was received. For example, income received in September 2021 would need to be reported by 31st January 2023. Self-assessment returns can be filed online, and all income must be disclosed on a return not just the information relating to the cryptoassets, for example employment income would also need to be reported.
How the Shorts team can help
Shorts can assist with the filing of the tax returns, considering your tax return filing position and we can also offer practical advice if you already have, or are thinking about investing in, this type of asset.
