Cryptocurrencies are once again making headline news. But before you get in on the latest investment opportunity, you must know how they are taxed in the UK.
The story of cryptocurrencies such as Bitcoin or Ethereum is well known, with the impressive inflation of the digital assets’ prices creating riches for many crypto investors.
But after an unprecedented amount of global money creation to prop up economics during the pandemic, more and more Government-created cash found its way into the crypto markets, raising prices higher than ever before.
But just how almost every part of the economy is down with rampant inflation, so is the crypto market as investors flee from ‘risk-on’ assets like cryptoassets.
However, others might be thinking that this downturn is only temporary. Therefore, could now be the time to ‘buy the dip’ and ‘hold on for dear life’?
If you reckon so, you’ll need to know exactly how cryptocurrencies are taxed so you don’t get caught out unawares – or worse, get in trouble with HMRC.
What is cryptocurrency?
Cryptocurrencies, also known as cryptoassets, are forms of currency that are completely digital. No single bank creates them or keeps track of their flow through accounts or ‘wallets’.
Instead, blockchain technology – an interlinked chain of digital information – keeps a record of every single transaction using a cryptoasset.
‘Miners’ work on their own, running powerful computers to validate transactions and add records to the blockchain, bringing the digital tokens into existence.
Purchased with standard currency like the pound or euro, crypto tokens were primarily created as a means of easy, convenient and untraceable exchange.
But now, most people bet on the markets, hoping to sell their tokens for more than they bought them for. Just like any other currency, they get their value from demand and scarcity.
How are cryptoassets taxed in the UK?
Presently, there is no official legislation that accounts for how cryptoassets should be handled for tax purposes. Instead, there is only guidance published by HMRC, which everyone should still follow to be on the safe side.
Contrary to its name, HMRC doesn’t consider cryptocurrency as currency or money. Therefore, buying and selling something like Bitcoin or Ripple does not amount to gambling for tax purposes.
Instead, HMRC considers them to be assets. And just like any other asset, profits made upon their disposal (sale) for personal or business use, may be subject to tax.
If you buy and sell crypto on the side in a capacity that can’t be considered as a trade, you’re using the digital assets for personal use.
In that case, capital gains tax (CGT) is most likely to apply to your profits when you sell, exchange or give away cryptoassets if it increased in value by a certain amount from the time you purchased them.
CGT is charged on assets (as opposed to property) at 10% or 20%, depending on whether you’re a basic or high-rate taxpayer and the worth of your capital gain.
Everyone gets an annual allowance (£12,300 for the 2022/23 tax year), so if your gain falls within your allowance, no tax is due.
Other taxes on cryptocurrencies
If your use of cryptocurrencies counts as a ‘trade’ in HMRC’s eyes, which it might do if it fulfils one or more of the badges of trade.
There are a number of these badges, which you can learn about in depth on the HMRC website. An example of a badge of trade is the source of finance you used to purchase an asset – if you borrowed money to buy a large amount of tokens, HMRC might say you’re in fact running a crypto investment business.
If that happens to you, you will technically be self-employed, and therefore liable for income tax on your gains.
Alternatively, if you run a business that provides goods or services and ask your customers to pay you in crypto, you may also be liable for corporation tax and VAT.
Need help?
Because there is no official legislation yet for the taxation of cryptoassets, a lot of it is handled on a case by case basis. Because of that, you should make sure you keep meticulous records so you’re prepared if HMRC comes knocking on your door.
We can keep track of the movement of your digital tokens on your behalf, so you focus on the movement of the markets.
Don’t hesitate to get in touch with us to talk about the tax treatment of your cryptoassets.