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What are cryptocurrencies?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Therefore, allowing for secure online payments.
Cryptocurrencies (or ‘tokens’), are cryptographically secured digital representations of value or contractual rights that can be:
- transferred
- stored
- traded electronically
Stored in a virtual wallet which can be accessed through apps or websites; cryptocurrencies are not managed by a bank or government. Meaning that if something were to go wrong there is no central authority able to step in. However, there is a public ledger where every transaction is recorded – also known as a ‘blockchain’. These operate with Distributed Ledger Technology (DLT), a digital system that records details of transactions in multiple places at the same time. A well-known application of DLT is the Bitcoin blockchain, which acts as a public record of all the transactions that have ever taken place.
As a trending investment option, there are many easy ways to purchase any number of cryptocurrencies that are currently out there. However, just because something seems like a good option due to increasing popularity, it doesn’t mean it’s a good idea or the right thing for you.
Cryptocurrencies have many myths surrounding them as a new currency one being that cryptoassets fall outside of the scope if UK taxation. This is simply not true, here we summarise the facts surrounding how cryptoassets are taxed in the UK.
How are cryptoassets taxed in the UK?
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.
HMRC does not consider cryptoassets to be currency or money.
The tax office has grouped cryptoassets into four main categories: exchange tokens, utility tokens, security tokens, and stable coins.
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.
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.
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 pay Capital Gains Tax when your gains from selling certain assets go over the tax-free allowance(called the Annual Exempt Amount). The Capital Gains tax-free allowance for 21/22is £12,300.
Buying crypto on its own isn't a taxable event. You can buy and hold cryptocurrency without any taxes, even if the value increases.
CGT is due when you dispose of the cryptoasset exchange tokens and a profit has been made. You can report and pay Capital Gains Tax by self-assessment it the CGT real time service, both must be completed in pound sterling.
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.
This is why you must keep separate records for each transaction, including:
- 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.
You may also want to keep other records such as wallet addresses.
HMRC might ask to see your records if they carry out a compliance check.
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.
Should I invest in crypto?
With a rapid rise in price over the last several months, there are concerns that crypto could be in a bubble. While there have been ups and downs with cryptocurrencies, the recent runup for many cryptos could indicate this.
When prices get this high, some investors are more likely to want to start taking profits. When that happens, they sell their coins for a high price. However, that selling of assets starts prompting price drops. If the price drops enough, there won’t be buyers for cryptos, and the crash could leave investors who got in later with large losses. If you invest in crypto, make sure you consult a tax professional.
There’s nothing wrong with wanting to invest in crypto, if it’s interesting to you. In fact, it could be a way to provide variety to your portfolio, as long as you have the risk tolerance for it. But before you get started, make sure you only use money that you can afford to lose. And again, firstly consult a tax professional before tipping your toe in the water.
If you have any questions about cryptoassets or any other investment queries then get in touch with the team at Blue Rocket, our friendly team of accounting experts can help walk you through your options and assist you on your investment journey.
Let us help grow your investment portfolio, call 01322 555442 to speak to someone today.
