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Are you getting your cryptocurrency tax right?

David Francis David Francis

Investing in cryptocurrency has been lucrative if you know what to do and have the right strategy.  It's not surprising that HMRC’s attention has turned to the tax treatment of any windfall. David Francis looks at what the taxation of cryptocurrency means for you.

HMRC have been sending out ‘nudge letters’ to people they believe have been buying and selling cryptoassets. This kind of nudge letter gives you one more chance to get your tax affairs in order before HMRC pursue more punitive action, so are not to be taken lightly. To help you get it right, we answer some of the most common questions around them.

Do I really need to consider tax when dealing in Cryptocurrency?

The simple answer is yes.  But, as with most tax issues, the simple answer usually leads to a more complex set of guidelines and rules. Crypto is becoming an increasingly popular alternative investment. Some cryptocurrencies, such as Bitcoin, have increased in value significantly over the past five years.

Unfortunately, even among investors, not many people understand the nuances of crypto and even fewer understand the tax implications.

So how is crypto taxed and is it capital or income? 

There will be occasions when crypto will be treated as trading income and taxed as income.  Establishing whether you are trading will depend on a number of factors, including the frequency of transactions, how much time you devote to the activity, and the level of organisation. This is more indicative of mining for crypto, rather than just buying and selling currency as a pure investment.  For most people, in its most simplest form, crypto will be treated as a capital asset and subject to capital gains tax rates. 

What is a disposal for capital gains tax purposes?

As with most capital assets, you’ll be liable to pay capital gains tax when you sell or dispose of the asset. ‘Disposal’ has been defined by HMRC as:

  • Selling crypto assets for money
  • Exchanging crypto assets for a different type of crypto asset
  • Using crypto assets to pay for goods or services
  • Giving away crypto assets to another person

Basic capital gains tax rules apply and the amount of chargeable gain will be the difference between the sales proceeds from the disposal and the crypto asset’s acquisition cost – the sale price minus the buying price give us a gain or loss position.

Tax is never that straightforward and crypto is subject to a similar set of identification rules to those that apply to investors that deal in shares. The cost of each crypto coin purchased of the same currency is ‘pooled’ in one pot and an equal share of the cost is then allocated to each coin.  A proportion (based on the number of coins sold) of the whole cost can be offset against the disposal proceeds if only some of the crypto coins are sold. 

How do I calculate and report gains?

Crypto sales are generally reportable on self-assessment tax returns and the normal tax return deadlines apply. That doesn’t necessarily mean that all crypto sales will be subject to tax.  Individuals have a capital gains tax annual allowance (£12,300 in 2021/22) meaning that no capital gains tax is due if gains are below the annual allowance.  However, all capital transactions are reportable (even if no tax is due) if the total sale proceeds for the year exceed four times the annual allowance.

Calculating gains is not necessarily straightforward with many cryptoassets traded on exchanges that do not use pound sterling or exchanged for another cryptoasset.  Swapping one type of cryptoasset for another is a disposal for capital gains tax, even if no physical currency has been exchanged.

I haven’t notified HMRC that I have sold cryptocurrency or I have miscalculated my gain

The taxation of cryptocurrency is a relatively new concept and with all things new it's inevitable that things will go wrong.

Whether you haven’t paid tax on the correct gain, or you didn’t realise that investing in crypto had tax implications, what's important is getting it right by coming forward, owning up and taking responsibility. From a commercial point of view, it makes sense to come forward and speak to HMRC, as they will always charge a lower penalty for a voluntary disclosure than if they had discovered the issue themselves.

Putting things right can be a daunting prospect, but we can help by identifying the best way for you to make a disclosure, and supporting you through the process to minimise any follow-up questions and further penalty exposure. , HMRC typically follow up with a full enquiry which is more stressful and costly in our experience.

Get in touch with David Francis if you have any questions about cryptocurrency and your tax position.