You may be surprised to learn that there is currently no specific UK tax legislation exclusively designed to deal with cryptocurrency.
Instead, any tax liabilities depend upon the way the profit was gained and the circumstances of the business or individual.
In practice, this means that buying or selling using cryptocurrency – or acquiring cryptocurrency as an investment – could result in a liability to Income Tax, Capital Gains Tax or Inheritance Tax.
If a taxpayer is deemed to be actively trading in cryptoassets, typically spending a significant amount of time each week transacting on one or several exchanges, HM Revenue & Customs (HMRC) could deem that the income derived from these activities falls under the badges of trade legislation and as such would require the taxpayer to calculate income tax on any profits realised.
Income tax would be charged at a rate of 20, 40 or 45% depending on the profits generated and the taxpayer’s other income. Class 2 and Class 4 National Insurance could also become due, again depending on profits realised.
In most cases, where the amount of activity connected to cryptoassets was not deemed to constitute a trading activity, Capital Gains Tax (CGT) would be due on any profits realised.
CGT is due if total gains arising from disposals in any single tax year exceed the annual exempt amount (for 2020/21 this was £12,300) This allowance does not just cover cryptoassets but also includes any gains made from all other capital assets such as shares or property.
Taxpayers are at risk of HMRC scrutiny as many do not realise what is classed as a disposal for CGT purposes and so are not declaring the proceeds on Self-Assessment Tax Returns.
HMRC provides the following guidance on the CGT treatment of cryptoassets when considering what constitutes a disposal:
A disposal of cryptoassets takes place when you:
- Sell cryptoassets for flat currency such as US dollars, GBP Sterling or Euros – profits from these transactions are taxable, even if the money you make is not withdrawn from your cryptoasset exchange
- Exchange one cryptoasset for another – e.g., Bitcoin to Ether. CGT is payable on these gained even if you do not convert your cryptoassets back to fiat currency
- Use cryptoassets to buy goods or services
If you gift cryptoassets during your lifetime to another party then the transaction could become chargeable to Inheritance Tax (IHT) depending on the value involved. When gifting any assets we would always suggest you seek professional advice as there are many factors to consider.
If you gift cryptoassets on death, the value of such assets will need to be included on the IHT returns submitted to HMRC during the Probate process.
What action do you need to take?
- Review your cryptoasset transactions. Could the activity fall under the Income Tax or Capital Gains tax regime? If you are certain that you do not have any tax to pay, no further action is needed.
- If your activity constitutes a trading activity have you registered for self-assessment and declared the profits or loss accordingly?
- If you’ve made gains for CGT purposes that exceed your annual exempt amount, have you notified HMRC using your self-assessment tax return?
- If you have made losses under the CGT rules, have you considered how best to claim these? Losses can be claimed either through your self-assessment or directly to HMRC within 4 years of the loss.
- If you have undeclared trading or capital transactions from previous tax years you can inform HMRC by completing a voluntary disclosure or amending an existing self-assessment tax return that you have already filed.
How can RT help?
Our tax team are specialists in handling tax issues relating to cryptoassets.
We can advise you on the specific tax treatments for all types of cryptocurrency and deal with the practicalities of preparing and filing your self-assessment tax returns.
For help and advice, get in touch with us now.