Cryptocurrency has been the hot investment topic at the forefront of the news and social media across the past 12-18 months, and HMRC are now looking to collect their slice of the pie. Therefore, if you’re looking to invest in crypto, you must consider how this currency is treated for tax purposes.
What is Cryptocurrency?
Cryptoassets (or cryptocurrency) are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically.
Bitcoin, Ethereum and Ripple are the most well know cryptocurrencies. Cryptocurrencies are traded on exchanges, such as coinbase and binance. However, the cryptocurrency market has grown such that many cryptocurrencies can now be traded on regular trading apps along with stocks and shares, and through banks and payment platforms.
Tax Treatment of Cryptocurrency
For tax purposes, cryptocurrency is largely taxed in the same manner as shares. If an individual makes a personal investment into cryptocurrency, they will be treated as holding an asset. If the cryptocurrency was then sold, capital gains tax would become payable at 10/20% on any gains made in excess of the annual exemption. Any losses made are also allowable losses for capital gains tax purposes, and can be offset against other gains in the year, or can be carried forward against future gains.
Only in exceptional circumstances would HMRC expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that it is deemed to be trading, and as such any income being chargeable to income tax rather than capital gains tax.
What is deemed a Disposal?
It is important to consider what is deemed a Disposal of cryptocurrency for Capital Gains Tax purposes. It is a common misconception that a Disposal only takes place when a token is sold for cash which is deposited into a wallet on the exchange. However, for cryptocurrency purposes, a Disposal is a broad concept which includes:
- selling tokens for money
- exchanging tokens for a different type of token
- using tokens to pay for goods or services
- giving away tokens to another person (unless it’s a gift to their spouse or civil partner)
There would be no Disposal if an individual retained ownership of a token through the transaction, and was simply moving tokens between exchanges that they beneficially own.
HMRC Crypto Crackdown
HMRC released consolidated tax guidance earlier this year in relation to UK tax rules on cryptocurrency. On top of this, they have also reached an agreement with the leading exchange, Coinbase, to provide them with information on its users with more than £5,000 worth of cryptoassets on the platform during the 2019-20, and 2018-19 tax years. It is likely HMRC will get agreements in place with all exchanges so they can directly access information relating to investors and can raise investigations and assessments where gains have not been previously reported.
It is therefore likely that we will see many assessments and investigations raised over the next year or so, as HMRC look to collect tax that should have been paid on gains made on cryptocurrency.
If you have disposed of any cryptocurrency which has not been reported on your self-assessment returns, please do contact us for further guidance.
Related blogs in this series:
Cryptocurrencies part 2: Trading and Mining Cryptocurrency
Cryptocurrency part 3: Niche Areas within Cryptocurrency
For further guidance on cryptocurrencies and their tax implications:
Before going any further, businesses and entrepreneurs should understand how cryptocurrencies are taxed, the tax guidance from HMRC, and key developments in the crypto tools that may impact how you invest.
For further guidance, please get in touch or contact your usual MHA advisor.
