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Cryptocurrency may live online with no government control or borders, but if you are in the UK, you may need to pay tax and keep records for filling in a self-assessment return when you receive or sell digital coins or tokens.
HM Revenue & Customs (HMRC) has published detailed guidance describing how tax works for cryptocurrency. The guidance covers:
- Receiving tokens from mining;
- Payments from employers in cryptocurrency;
- Selling cryptocurrency;
- Exchanging cryptocurrency for another cryptoasset;
- Paying for goods or services in cryptocurrency; and
- Giving away cryptocurrency or donating them to charity.
This article sets out the main points about paying taxes on cryptocurrency in the UK.
What is Cryptocurrency?
The first step in deciding if you should pay tax on receiving or disposing of cryptocurrency is understanding what HMRC means by the term.
HMRC guidance talks about four classes of cryptocurrency:
Exchange tokens
Intended as a means of payment, like Bitcoin. Many people hold exchange tokens as investments due to their potential to rise in value.
Utility tokens
These give holders the right to buy goods or pay for a service. Filecoin is an example. The owners accept the token to allow users access to cloud storage.
Security tokens
Like stocks and shares, security tokens pay interest or dividends. A typical security token generates profits for the holders off the enterprise of others. The Facebook-backed Libra project is an example of a utility token.
Stablecoin
The tracker funds of cryptocurrency. Stablecoins are pegged to the value of another asset, like the US dollar or price of gold and track their value. Tether is probably the best-known stablecoin.
The point to remember is cryptocurrency is not money, but the tax treatment depends on the type and use of the token.
Am I a Cryptocurrency Investor or Trader?
The tax treatment of your cryptocurrency transactions depends on if HMRC views you as a trader or investor.
Investors tend to hold cryptocurrency for the long term although they can buy and sell after holding for a short time. Investors will pay capital gains tax on any profits they make over the annual CGT tax-free allowance.
The current tax-free allowance for individuals is set at £12,300, which is frozen until April 2025.
Traders make a living from buying and selling cryptocurrency. The money they make is taxed as income in the same way as a business.
This guide is aimed at investors rather than traders.
Tax and Receiving Cryptocurrency
You can receive cryptocurrency in many ways, but the main four are:
- From mining other than as a trader;
- Payment from an employer;
- Buying from an exchange; and
- As a gift.
Mining Cryptocurrency
Mining cryptocurrency is treated as taxable income and you must report the transactions on a self-assessment return unless the tokens are valued at less than £1,000 or you received less than £2,500 from other untaxed income.
Employers Paying in Cryptocurrency
Decide if your employer is paying you in cryptocurrency that is a readily convertible asset.
A readily convertible asset is a token that can easily be exchanged for cash.
If the token is a readily convertible asset, a UK employer must run the payment through PAYE to deduct income tax and national insurance contributions before paying you the balance.
If a token is not a readily convertible asset, you should report the income on a self-assessment return and pay any tax due.
Buying or Receiving Cryptocurrency as a Gift
Simply holding cryptocurrency by buying from an exchange as an investment or receiving them as a gift does not lead to any tax until you sell, exchange or give them away.
The rule of thumb is no tax is due while you keep ownership of the cryptocurrency.
Tax on Selling Cryptocurrency
HMRC wants to know about your cryptocurrency transactions as Capital Gains Tax may be due when your profits are more than the annual allowance.
A disposal is triggered if you:
- Sell cryptocurrency;
- Exchange tokens you own for one or more cryptocurrencies;
- Spend tokens; or
- Gift your tokens to someone other than a spouse or civil partner.
Working Out Capital Gains Tax for Cryptocurrency
You must keep track of each cryptocurrency transaction for capital gains tax.
The gain is the selling price of your tokens less the buying price and any allowed costs.
If your tokens were free, use the market value at the time you received them to work out any gain or loss. HMRC offers a valuation checking service to make sure the figures are right.
Remember, if you have already paid income tax on receiving tokens, you only pay capital gains tax on any profit you make at their disposal.
You can reduce your profits with some allowable costs or capital losses.
Allowable costs are:
- Fees involved in adding the transaction to the token’s blockchain;
- Advertising for a buyer or seller;
- Charges relating to drafting contracts for the transactions;
- The cost of any valuation for working out a gain; and
- Some pooled costs of your tokens.
HMRC will not allow costs against profits that are already taxed as income or any relating to mining.
Pooling Cryptocurrency Tokens
Pooling applies to investors holding more than one kind of token, so all your Bitcoin transactions go into one pool, while Ethereum holdings would go into a second pool.
Pooling is the same as adding all your buying costs together to give an average purchase price for tokens of the same kind.
For example, you buy a Bitcoin for £30,000 and then two more for £35,000 each. Your Bitcoin pool has three tokens worth £100,000 with an average cost of £33,333 each.
You sell two Bitcoin for £75,000. The cost of the Bitcoin for capital gains tax is £66,600 (£33,333 x 2), leaving a gain of £8,334 (£75,000 - £66,666).
Same-Day Trades, Bed and Breakfasting and the 30 Day Rule
If you quickly buy and sell cryptocurrency, the tokens don’t go into the main token pool but become their own pools.
The pools are for trades within 24-hours (Same-day) or within 30 days (bed-and-breakfasting or 30-day). These capital gains tax transactions are complicated and best left to an accountant or specialist software.
Records to Keep as a Cryptocurrency Investor
HMRC may ask for your cryptocurrency records if a compliance check is run against your figures. You must keep records to show how you arrived at the figures in your self-assessment return.
The law says you must retain for five years following the January 31 submission date for the tax year the transaction fell in.
For example, if you sold Bitcoin in September 2020, which falls in the 2020-21 tax year. The filing deadline is January 31, 2022, which means the records should be kept until at least January 31, 2027.
If HMRC has given you a different filing deadline, the same five-year rule applies.
Cryptocurrency records should cover each purchase and sale and be split into pools. You can keep the records on a spreadsheet, in writing or on specialist software, but they should include:
- Token names and types;
- Date you bought or received them;
- Value in Sterling on the date you received them;
- Date of disposal;
- Name, type and how many tokens you disposed of;
- How many tokens you had left after the disposal;
- The token disposal value in Sterling;
- Bank or cryptocurrency exchange statements and wallet keys showing any purchases or sales;
- Details of any pooled costs before and after you disposed of the tokens;
- Any allowable costs to reduce the gain on disposal; and
- The names and contact details of the exchanges, sellers or buyers you deal with.
Do I Need to Fill In a Self-Assessment?
To report and pay Capital Gains Tax, you have two options:
- Fill in a Self-Assessment tax return at the end of the tax year; or
- Tell HMRC about the tax you owe with the Capital Gains Tax Real-Time Service straight away.
If you have any questions about the issues raised in this article, we at Key Business Consultants can help. Get in touch with us today or call us directly on 02037 282 848.
