With cryptocurrency being a hot topic at the moment, focus soon moves to cryptocurrency tax and how much you’ll need to pay in the UK.
Are you trading, or just investing? How can you tell? And what exactly is cryptocurrency?
We’ll delve deeper into cryptocurrency and how it’s taxed in this blog.
What is Cryptocurrency?
You don’t have to go very far to hear people talking about cryptocurrency and Bitcoin, and the crypto-space has absolutely exploded amid the COVID pandemic, with people looking to invest their savings, and in some cases government support, for a high return when other options are earning little to no interest.
The likes of Elon Musk and other prominent stock market brokers across the globe invest in a multitude of different cryptocurrencies, and more businesses are now accepting it for payments too.
So what is cryptocurrency? In short it is a new version of digital currency. So instead of cold hard cash in wallets, you will own a digital version of currency which can fluctuate in value (in some cases quite wildly) from hour to hour.
You can hold it and watch as it appreciates (and sometimes depreciates) in value with a view to cashing in later down the line, or you can buy and sell it much like the stock market trades in stocks and shares.
It is not for the faint hearted however, and as with all investments requires a strong stomach and lots of research!
Some say that cryptocurrency is much like gambling, and in some aspects that is true as there is no guarantee you’ll gain anything from it. You may be left ‘holding the bag’ if you buy without research first, which essentially means other holders can pull out all the money invested in a cryptocurrency, leaving you with a holding that is worth zero.
Cryptocurrency is taxable, unlike gambling winnings, so you should make sure you’re aware of what taxes you’ll pay before you start investing.
How is Cryptocurrency taxed in the UK?
Before we discuss the cryptocurrency taxes involved, we first need to understand the difference between investing, trading and mining cryptocurrency, as this distinguishes what taxes you’ll pay.
- Investing in cryptocurrency involves you putting in a sum of money and holding it for a while as its value goes up and down.
- Trading in cryptocurrency involves you buying and selling frequently (often multiple times a day) to make a profit.
- Mining cryptocurrency involves using a high powered computer to solve complex mathematical puzzles or to verify trades that are happening in the crypto markets, and being paid in crypto-assets.
By investing in cryptocurrency, you’ll be able to use your capital gains tax free allowance (£12,300 2021/22), which means you can have capital gains of up to this amount per year before you pay any capital gains tax. For a small investor, this will likely cover any annual gains they make from cryptocurrency.
It’s worth noting here that gains are recognised when you trade your assets as well as sell them, so if you swap Bitcoin tokens for an Ethereum tokens, this gain (or loss) is recognised for tax purposes.
Taxes on gains range from 10% for total income (including employment/self employment) up to £37,700 to 20% for total income above £37,700.
Example 1:
£30,000 of cryptocurrency gains & £30,000 annual salary
The first £12,300 of your cryptocurrency gains are tax free, and the next £17,700 are taxed at 10% = £1,770 capital gains tax
Example 2:
£50,000 of cryptocurrency gains & £100,000 annual salary
The first £12,300 is tax free, and the next £37,700 is taxed at 20% * = £7,540
* because you’ve used all your basic tax allowance (up to £37,700) from your employment income
If you decide that you want to trade in cryptocurrency or get involved in staking or yield farming, then your earnings are taxed as income, and will go towards any taxes you pay on your earning income from employment, and self employment.
Your personal income tax free allowance can be utilised for trading, staking and yield farming if you have no other income, but be aware that if your personal allowance is already being used up elsewhere, you’ll likely pay higher taxes.
Will the HMRC know I’ve been trading in Cryptocurrency?
As all cryptocurrency is dealt with on the blockchain, which essentially means there is a digital fingerprint for every single transaction, it will be next to impossible to avoid paying cryptocurrency taxes.
The HMRC receives transactional data from cryptocurrency exchanges, so to avoid being pursued by the HMRC, it’s important that all transactions are reported under self assessment.
What if my limited company invests in Cryptocurrency?
Companies are usually prohibited by their formal incorporation documents (Memorandum and Articles of Association) from gambling, therefore transactions where cryptocurrency is being bought and sold (or even traded) will be regarded as trading for tax purposes. This means they will be taxed under the usual corporation tax rules.
Unfortunately, limited companies don’t get a tax free allowance either, and any gains made on these investments within a limited company are taxed under corporation tax rules at 19% (rising to up to 25% from 1st April 2023, depending on profits).
The good news is that if a limited company makes any cryptocurrency tax losses, these can be used against any profits from its regular trade too.
Finally, cryptocurrency mining is currently outside the scope for VAT, so it won’t count towards your VAT thresholds either, and trading is exempt for VAT purposes too.
Cryptocurrency tax can be complex, but we’re here to help! If you need to talk through how to manage your cryptocurrency transactions and report them on your tax return, you can book a call with one of our advisers by completing our contact form.
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