Cryptocurrency is the talk of the town right now! Its hype has taken over the world amid the COVID pandemic. Right from Elon Musk to Mike Tyson to Kanye West, several people across the globe own one or the other cryptocurrencies.
What is cryptocurrency?
A cryptocurrency is a type of digital money created from code. They function autonomously, outside of traditional banking and government systems.
Cryptocurrencies use cryptography to secure transactions and regulate the creation of additional units. Bitcoin, the original and by far most well-known cryptocurrency, was launched in January 2009. Today there are over 1,000 cryptocurrencies available online.
Cryptocurrencies differ significantly from traditional fiat currencies. Nonetheless, you can still buy and sell them like any other asset. They are going mainstream — and becoming increasingly difficult for investors to ignore. With the value of some crypto assets, especially Bitcoin, rising significantly over the last year, it is inevitable that people will be curious about the tips and traps when investing.
There was a popular misconception that the profit or gains arising from crypto assets transactions are viewed as gambling or lottery type winning and therefore are tax-free.
This is not the case, and like any form of asset, there are various UK tax implications from buying and selling crypto assets.
Do I need to pay tax on my crypto profits?
The short answer is yes.
In December 2019 HM Revenue and Customs published their guidance document on crypto-assets for individuals, covering ‘exchange tokens’ (exchange tokens are intended to be used as a method of payment and encompass crypto assets like Bitcoin) and HMRC make it very clear that profits from buying and selling Bitcoin and any other crypto-assets are subject to tax.
Broadly, the rules are as follows:
- Anyone buying and selling cryptos in an individual capacity is most likely to be subject to UK Capital Gains Tax (CGT) on any gains made. Saying that you only have to pay capital gains tax on overall gains above the annual exempt amount.
According to HMRC, the capital losses from cryptocurrency can be considered for tax liability. If you sell the crypto for loss, then the loss can be deducted to reduce the overall capital gain. Also, exchanges of crypto for fiat or crypto for another crypto are both taxable events.
Overall, be aware of the fact that your crypto portfolio just like your shares portfolio, if you make a profit, it will be liable for tax.
- For those who are considered as cryptocurrencies traders (i.e. buying and selling with a high frequency), Income Tax may be due on the profits as trading income. HMRC’s view is that only in exceptional circumstances would it expect individuals to buy and sell crypto assets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade.
- For those who receive crypto assets as a non-cash payment for employment, there are Income Tax and National Insurance Contributions (NIC) implications to consider as you have with cash payments.
Most individuals who are buying and selling Bitcoin or other crypto assets are more likely to be within the scope of CGT rather than income tax. However, the facts of each specific case will determine the position.
How do I pay tax on my crypto profits?
As with all tax you pay on profits, you will have to do a tax return to declare your income to HMRC.
If you have never done one before, do not worry. The process is not too complicated if you know what you are doing. Follow the below steps and you will be on the right path!
- Make sure you register for Self Assessment by 5th October.
- Keep a good record of your trading profits and expenses through the tax year.
- Pay the tax you owe by 31st January.
- Calculate the tax you owe as soon as you can to prepare for the bill.
HMRC now receives information directly from UK crypto exchanges/platforms and so not disclosing transactions will most likely result in a HMRC enquiry and could lead to HMRC imposing penalties and costing you more.
For example, last year Coinbase, the digital currency exchange confirmed that it had shared with HMRC details of UK resident users who have used its platform with Crypto transactions of £5,000 or more in the 2019/20 tax year.
HMRC has allocated resources to ensuring the tax due on cryptocurrencies transactions are declared through collaboration with their international partners.
The J5 (Joint Chiefs of Global Tax Enforcement comprising Australia, Canada, the Netherlands, the USA and the UK) are also already sharing information on the use of crypto-assets and foresee more information being shared globally in the coming years in a coordinated effort to tackle tax crimes.
As a result, we expect to see an increasing number of HMRC enquiries focussing on those who buy and sell crypto assets.
If you are uncertain whether your profits and gains from cryptocurrency should be included on your tax return, or if you have undeclared historic profits or gains arising on crypto transactions, you should consider seeking advice as this is a rapidly developing area of tax.
What should I do if I have failed to correctly report crypto sales?
It is always preferable to make a voluntary disclosure to HMRC to correct errors or omissions rather than wait for HMRC to make contact. This will likely lead to lower financial penalties (if due) and may also reduce how far back the disclosure covers.
Whilst the appropriate route for disclosure will turn on the specific circumstances, HMRC do have online disclosure facilities which are likely to be appropriate in most cases where a correction is required.
If you have a question or wish to discuss your situation and ways to save on Capital Gains Tax, please feel free to contact the Outsourced team at 0208 249 6007.
Written by Irina Strucere