- Bitcoin and cryptocurrencies are not to be considered as currency or money
- Full records of your transactions in cryptocurrencies have to be kept
- Profit gains on cryptocurrencies are subject to Capital Gains Tax (CGT)
- Businesses and individuals should take additional pre-caution on security and management of their crypto reserves and use of custodial solutions
Cryptocurrencies are a new type of asset that has become prevalent in recent years. Many people find confusing the way cryptocurrencies are transacted, stored and traded electronically. More so that some people are unclear about what cryptocurrencies really are and the particular tax treatment that should be applied in transacting them. The general view of the UK government on these assets is that they are subject to particular types of tax treatment depending on a number of situations. These situations are a set of different taxable events that occur depending on the type of transaction. Examples of such events are selling cryptocurrency, trading cryptocurrency, mining cryptocurrency, paying for goods and services, and receiving airdrops, forks or other compensation. HMRC defines cryptocurrencies as ‘cryptographically secured digital representations of value‘ with the assistance of the Cryptoassets Task Force their taxonomy has been established. The Task Force has issued a report that lays out the policy and regulatory treatment of the crypto assets dividing them into exchange tokens, utility tokens and security tokens.
- Exchange tokens are to be used as methods of payments such as Bitcoin and other cryptos meant for transacting value.
- Utility Tokens provide the holder with access to particular goods or services that are based upon the particular DLT architecture platform.
- Security tokens would provide an equity share, debt or economic interest in a DLT based business.
HMRC does not consider cryptoassets to be currency or money.
Use Case I: Buying/Selling Crypto
The first point of transacting with cryptocurrencies for users would be buying and selling them. Every individual would have a different exit strategy upon buying cryptos. For many, it is prevalent holding them a certain time period then reselling them for profit/loss. Buying and selling crypto assets by an individual will normally amount to investment activity. Every time you sell your crypto this triggers a taxable event which can result from either a crypto-crypto or crypto-fiat transaction. For the purpose of the calculation of your tax basis, both “ends of the stick” fiat-crypto-fiat are required. This taxable event is the most important in your cryptocurrency transactions history. This also sets the foundational baseline for your crypto tax and bookkeeping as the fiat-crypto value and the particular time period would be set for future calculations of other taxable events. These transactions would also be the representation of your cost basis that determines future capital gains or loss on the exchange of crypto assets. Individuals will be subject to Capital Gains Tax based on your income and an annual allowance. If a tax is due it is only on the gain that you have made, not the entire amount you receive from the sale. You can also include transaction costs such as transfer fees when calculating your gain.
The annual tax-free allowance for an individual’s asset gains is £11,700 for 2018/19. If the profit from selling your cryptocurrency, in addition to any other asset gains, is less than this, you won’t have to report or pay tax on it.
Therefore, if cryptocurrency is bought and subsequently sold, any gain realised following conversion of the purchase and sale prices into the Sterling exchange rate (on the relevant dates of sale and purchase) is subject to CGT at the appropriate rates. It has to be noted though that the HMRC is not clear on the exchange of crypto to crypto either with a gain or loss as a non-taxable event. Henceforth, from my understanding, if you are not converting your crypto to fiat you won’t be due to pay any taxes up until the point of conversion back to fiat.
Donating cryptocurrency to a tax-exempt organisation can prove to be a great way to donate to a good cause and reduce your tax bill by charitable deduction. There are a couple of main points here. The organisation has to explicitly state the direct acceptance of the particular currency as a donation. Secondly, you can’t cash in on your gains then donate afterwards as these are two separate events. The tax-exempt organization would receive your donation at full value then you can claim a charitable deduction to reduce your taxes afterwards.
Use Case II: Trading Crypto
In this use case, we are going to consider active investing in a short time period with numerous transactions or in other words trading. Speculation on the price of different cryptocurrencies has made millionaires of many while many times more people have gone broke. No matter, millionaire or broke the taxman is always there looking over waiting for its share. Thinking that you can dodge a bullet and let it pass a few years or liquidate back into fiat, later on, may backfire. On the flipside, those that lost a lot may be able to offset any losses to other types of income or tax for the particular period.
So how do you know if you are an investor buying/selling or a trader? HMRC apply a series of tests known as ‘The Badges of Trade’ to determine whether a trading activity has taken place. Different criteria are applied such as the volume of transactional activity, intention, the speed of transactions, organisations, debt, among others. Once you establish your standing then you would have to get in the appropriate entity subject to different tax treatments. For example, as an investor, you would be subject to Capital Gains Tax. On the other hand, if you are fully dedicated to trading cryptocurrencies full-time and registered as a business you will be subject to corporate tax on your business activities. All transactions from fiat to crypto and back to fiat would be included in the cost basis for your tax calculation which ultimately would lead to the capital gain/loss amount that the Taxes will apply upon. The cost basis includes all transactions from crypto to crypto, fees, exchange transfers and it is calculated on the total fiat value. If you are trading part-time on the side as a sole trader this could be considered as subject to Income Tax that will take priority over Capital Gains Tax. An individual who is trading may be able to reduce their Income Tax or CGT liability by offsetting any losses from their trade against future profits or other income. More on this can be found on HMRC’s Losses: HS227 Self Assessment helpsheet
Trading in cryptocurrencies is exempt supplies for VAT purposes.
A philanthropic way to reduce your tax bill is by ”gifting” cryptocurrency. By making a P2P wallet transfer that is directly attributable to yourself or another person, not an exchange or a different entity, you can claim the ‘inheritance’ of this gift up to the allowable annual gift exclusion. Make a note of the value of the gift on the date of the gift in case you sell it in the future.
Wallet-Wallet & Exchange-Exchange transfers are not taxable events.
Use Case III: Mining & Staking
The final use case we are going to consider is mining, staking, airdrops and other miscellaneous crypto activities. Cryptocurrencies mining is a process in which transactions from various forms of cryptocurrency are verified and added to the blockchain digital ledger. This process involves expensive computing hardware, free mining software and electricity consumption as a constant expense for the activity. The taxation of mining would depend on the degree of activity, the type of your organisation, commerciality and risks involved. In terms of mining, the size of your operation is critical for determining your tax liability. Whether your crypto mining activity gains should be considered as taxable events would depend on the commercial size. Are you running a business or ‘hobby mining‘? Mining as a business activity will be subject to corporation tax. Hence if you have a significant mining operation you would have to register as an LLC. Income received from Bitcoin mining activities will generally be outside of the scope of VAT.
Staking cryptocurrencies and receiving “interest” on your crypto staked could be seen as savings income. Airdrop is when a large number of cryptocurrency is distributed evenly into wallets within a set of given parameters. Tax treatment consideration is also given for this activity on a case by case basis, but free money invites taxes, you can ask any lottery winner.
Gambling Income Loophole
In the new policy paper, HMRC closed the loophole where an individual would be allowed to classify their investment in the cryptocurrency as “gambling”, winnings from which are tax-free.
To wrap up, I hope that this article has proven useful for understanding the different ways you can account for your annual tax liability coming from crypto activities. Remember that it is crucially important to keep records of your transactions. You can download trading history from your exchanges, though it will be good to keep an excel sheet or a folder with all the different transactions and receipts. Record keeping has to include the type of crypto asset, date of the transaction if they were bought or sold and the number of units. The value in pounds sterling, cumulative totals as well as bank statements and wallet addresses are very important. Keeping it simple is crucial to getting everything right especially if you are dealing with massive amounts of transactions and capital. Great tool to help you with filing your crypto taxes is https://tokentax.co/ . I am not affiliated with them nor is this a sponsored post, but they offer a good tool. Keeping it simple is crucial to getting everything right especially if you are dealing with massive amounts of transactions and capital. Whether sold for fiat, sold for another cryptocurrency or even sold to pay for a good/service. It is this selling of your cryptocurrency that triggers a ‘taxable event‘. This leads to a common strategy of many crypto-players to JUST HODL.
- Government Publication from 2018 – https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals
- Government Publication from 2014 –https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies
- Crypto Assets Task Force Report – https://www.gov.uk/government/publications/cryptoassets-taskforce
- Photos by Pexels
Disclaimer: Opinions are my own and not the views of my employer. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.