Do You Need To Pay Tax On Your Cryptoassets?
Cryptocurrency is an encrypted digital payment system working through a computer network which isn’t reliant on an authority to verify payments.
Different assets include exchange tokens (used as a means of payment or investment), utility tokens (provide access to goods and services), security tokens (provide right or interests in a business) and stablecoins (built to offer more stability, their value is tied to a real-world asset).
Are your cryptoassets subject to income tax or capital gains tax?
Cryptocurrency can be mined, exchanged or held for future gain and the tax treatment of your cryptoasset is dependent on the nature and usage of the asset, not the definition of the token.
Cryptocurrency is subject to income tax if you are mining crypto tokens and using the income you receive as day to day earnings, rather than holding them for long term gain. If this is the case, you must include your income on a self-assessment tax return, unless:
- Your cryptoassets are worth less than £1,000
2. Your other untaxed income is under £2,500
However, to have your mining classed as a trade is quite an exceptional circumstance. Much like the buying and selling of shares, there is quite a high bar for trade activities in the eyes of HMRC. There must be a lot of consistent transactions, a high level of organisation and a great degree of sophistication to be classed as trade income.
If you are earning Cryptocurrency through your employment, you must initially pay Income Tax and NICs on acquisition. CGT will then be liable on any gains/losses.
Capital Gains Tax
Unlike income tax, capital gains tax must be declared and paid on the disposal of cryptoassets.
A disposal of cryptoassets may include:
- Selling assets for fiat currency (GBP, USD, etc.)
- Exchanging one cryptoasset for another (exchanging bitcoin for ether)
- Using cryptocurrency to purchase goods and services
- Gifting cryptocurrency (gifting cryptocurrency will still count as a disposal, you must declare the amount gifted based on how much it was worth in fiat currency at the time of gifting)
If you feel any of these apply to you and your cryptocurrency gains may be subject to capital gains tax, here’s what you should do:
- Review your cryptoasset transactions
You should calculate the gain or loss on any sales, exchanges, or usage of your cryptoassets. There are certain allowable expenses you can offset against this. If your total gain is under the annual exempt allowance of £12,300, you will not need to do anything further.
- If your total gains exceed £12,300, you will need to declare this income on a self-assessment tax return
If you are a basic rate tax payer, your capital gains will be taxed at 10% and if you are a higher or advanced rate tax payer, your capital gains will be taxed at 20%.
3. If you have made a loss on your cryptocurrency sales, exchanges or usage, you can also file a self-assessment tax return, alternatively, you can write to HMRC within 4 years of the losses. These losses will be carried forward and offset against any future gains.
4. If you have calculated that the amount of cryptocurrency sold is over 4 times the personal allowance (£49,200.00) you will need to declare this as capital gains on a self-assessment tax return, regardless of total gains.
What counts as an allowable expense to offset against my gains?
Much like with property CGT you should keep track of what you’re spending in relation to your cryptoassets, and you can offset the following fees against gains:
- Consideration originally paid for the asset
- Transaction fees
- Professional costs to draw up a contract for acquisition / disposal
- Costs of making a valuation or apportion to be able to calculate gain.
The calculation would be as follows:
- Selling price – purchase price – allowable expenses = gain/(loss).
If you want help with getting a better understanding of how this may affect you, please get in contact with us.