There are several myths around the taxation of cryptoassets in the UK, one being cryptoassets fall outside the scope of UK taxation because they are viewed as a ‘winning’, similar to gambling or playing the lottery. That is not correct! Here we examine the definition of cryptoassets and how they are taxed in the UK.
What are cryptoassets?
There are thousands of different types of cryptoassets out there – or as you might know them, cryptocurrencies. Cryptocurrencies are cryptographically secured digital representations of value or contractual rights that can be:
- traded electronically
Cryptocurrencies are stored in a virtual wallet accessed through apps or websites. There is no central bank or government to manage the system or step in if something goes wrong. Every transaction is recorded in a public ledger, or ‘blockchain’ that operate with Distributed Ledger Technology (DLT), a digital system that records details of transactions in multiple places at the same time.
HMRC does not treat cryptoassets like money.
HMRC does not consider cryptoassets to be money or currency. Instead, the tax office has grouped cryptoassets into four main categories: exchange tokens, utility tokens, security tokens, and stablecoins.
- Exchange Tokens – Exchange tokens are intended to be used as a means of payment and are also becoming increasingly popular as an investment due to potential increases in value. The most well-known token, bitcoin, is an example of an exchange token.
- Utility Tokens – Utility tokens provide the holder with access to particular goods or services on a platform, usually using DLT. A business or group of businesses will normally issue the tokens and commit to accepting the tokens as payment for the particular goods or services in question. In addition, utility tokens may be traded on exchanges or in peer-to-peer transactions in same way as exchange tokens.
- Security Tokens – Security tokens provide the holder of a security token particular rights or interests in a business, such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.
- Stablecoins – Stablecoins are another prominent type of cryptoasset. The premise is that these tokens minimise volatility as they may be pegged to something that is considered to have a stable value such as a fiat currency (government-backed, for example US dollars) or precious metals such as gold.
The tax treatment of all types of tokens is dependent on the nature and use of the token and not the definition of the token.
How are cryptoassets taxed in the UK?
Anybody who resides in the UK and holds cryptoassets will be taxed on any profits made on them. This tax is Capital Gains Tax (CGT), meaning you pay tax on the difference between what your cryptocurrency cost you, and how much you sold it for.
You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount). The Capital Gains tax-free allowance for 20/21 is £12,300.
For example, you purchased an asset with cryptocurrency for £12,000. You brought that cryptocurrency for £8,000. You are required to pay either 10% or 20% (depending on your income) Capital Gains tax on the money made on the cryptocurrency, £4,000, unless it is within your tax-free allowance of £12,300.
CGT is due when a disposal has been made and a profit has been made and will need to be reported on a self-assessment tax return.
Do I pay tax on cryptoasessts if I don’t trade them?
No. In the eye’s of HMRC, what matters is the gains you make when the cryptoassets are sold, not the amount you have invested so far. If there has been no disposal there is no tax due. HMRC receives information from crypto exchanges. If you have exchanged one type of cryptocurrency for another then this is seen as a disposal and would be subject to CGT.
Do I have to pay income tax on cryptoassets?
There will be some circumstances where HMRC may take the view that the individual’s activities in buying and selling cryptoassets constitutes “trading”. This is then viewed as a form of generating income. For UK tax purposes, profits from a trade will be subject to income tax (up to 45% depending on your income), not CGT. Activities such as cryptocurrency “mining” and “staking” both can potentially be subject to income tax. However, this is very rare.
Do businesses pay tax on cryptocurrency?
Similar to personal CGT, a business is liable to pay tax on activities they carry out which involve exchange tokens, such as:
- Buying and selling exchange tokens
- Exchanging tokens for other assets including other types of cryptoassets
- Providing goods or services in return for exchange tokens
How can I plan for tax payments on cryptoassets?
Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return.
The onus is therefore on the individual to keep their own records for each cryptoasset transaction, and these must include:
- the type of cryptoasset
- date of the transaction
- if they were bought or sold
- number of units involved
- value of the transaction in pound sterling (as at the date of the transaction)
- cumulative total of the investment units held
- bank statements and wallet addresses, in case these are needed for an enquiry or review.
What investors really need to watch out for is the risk that their gains will have vanished by the time their tax bill is due. You may have made a gain, then a loss, and your CGT bill is then due when you may not have the funds to pay it. This is why it’s important to financially plan for those potential losses and seek guidance from tax professionals.
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