More than two million UK adults are believed to own some form of cryptoasset, such as NFTs and cryptocurrencies, with the average holding for each investor growing year by year.
Companies are also increasingly buying and selling on the global marketplace using cryptocurrency which gives rise to questions such as how they should be treated or classified for accountancy purposes.
Whether you are investing, mining or actively trading cryptoassets you need to understand the implications of your online activity on your tax position.
However, you may be unaware that you could be accruing considerable liabilities due to your investments or income from cryptoassets that could land you with a significant tax bill or even a tax investigation.
Tax rules for cryptoassets
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 any purchase or sale using cryptocurrency – or an acquisition of cryptocurrency as an investment – could result in liability for Capital Gains Tax, Income Tax or Inheritance Tax.
Understanding crypto taxation
Are you a miner, a trader, an investor or a company with an intangible cryptoassets holding?
How you derive your income from cryptoassets will significantly affect how you are taxed and the size of a potential bill.
Most investors will face tax on the gains that they make from their investments each year, while miners or traders may have to pay income tax instead, depending on their actions in a given tax year.
If you are involved with the cryptoasset markets, whether a part-time amateur investor or a long-standing crypto trader, you must not only report your income or gains correctly via self-assessment but also pay the right amount of tax.
No one wants to pay too much tax, so we can help you calculate how much you owe and offer advice on reducing your liabilities.
HM Revenue & Customs has shifted its focus to cryptoasset investors, miners and traders in recent years.
We can help you to complete your tax return correctly, remain compliant with the changing tax rules surrounding cryptoassets and provide you with a deeper understanding of how your activities online affect your tax position.
Capital Gains Tax and cryptoassets
The latest advice from HM Revenue & Customs (HMRC) provides the following guidance on the Capital Gains Tax treatment of cryptoassets:
A disposal of cryptoassets takes place when you:
- Sell cryptoassets – for fiat currency such as US dollars, GBP Sterling or Euros 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 total gains arising from all disposals in any single tax year are over the annual exempt amount (for 2020/21 this was £12,300) then CGT is payable. This allowance does not just cover cryptoassets but also includes any gains made from other assets such as shared or property.
Review your cryptoasset transactions. If you are certain that you do not have any tax to pay, no further action is needed.
Where a business is not trading in cryptoassets, and they are not treated as intangible assets any profits will be treated as a chargeable gain for companies.
The calculation of the gain follows pooling rules. Because different cryptoassets are not fungible each type of token has its own pool.
For example, if a person or company owns Bitcoin, Ether and Litecoin they will have three separate pools, and each has its own ‘pooled allowable cost’ associated with it
The pooling rules for Capital Gains Tax and Corporation Tax purposes are slightly different and businesses need to keep a record of the amount spent on each type of exchange token, as well as the pooled allowable cost of each pool.
If cryptoassets are held initially as stock and then transferred to investments, this will count as a disposal at market value for trading purposes and the capital or chargeable gain on any subsequent disposal will use an acquisition cost of the market value at the date of transfer out of stock.
Where exchange tokens held by a company have been accounted for as intangible assets, they will be taxed under the intangible fixed asset rules as long as they have been created or acquired by a company for use on a continuing basis.
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