Cryptocurrencies are becoming more and more popular. However, many crypto traders are unsure how HMRC taxes cryptocurrencies.
As cryptos rise in popularity, more people begin to trade and use these digital currencies. However, not many people know how the HMRC taxes cryptocurrencies. One of the most prominent myths surrounding taxes on cryptocurrency is that they are exempt from tax at all because they are viewed as “winnings”, similar to gambling or the lottery. That is misinformation. TS Partners are here to set the record straight.
What are Cryptos?
There are thousands of different cryptocurrencies available on the market. Cryptos are defined as cryptographically secured digital representations of value or contractual rights. Cryptos can be:
- Bought and sold electronically
- Transferred from wallet to wallet
- Stored online
All cryptocurrencies are stored using an online wallet, which users can access via apps or websites. There is no central bank to manage the system. Every transaction is recorded in a Blockchain that operates with Distributed Ledger Technology. DLT is a system that records the details of transactions in multiple places simultaneously.
HMRC’s Crypto Tax Definitions
HMRC does not view cryptocurrencies as money but instead groups them into four categories:
- Exchange Tokens – Exchange tokens are intended to be used as payment. They are rapidly becoming popular as an investment due to their potential to increase in value. Bitcoin is the most well-known form of exchange token.
- Utility Tokens – Utility tokens allow holders to access goods or services using DLT. Furthermore, utility tokens may be traded on exchanges or in peer-to-peer transactions, the same way as exchange tokens.
- Security Tokens – Security tokens provide the holder with particular rights or interests in a business.
- Stablecoins – Stablecoins are intended to minimise volatility. They might be pegged to items believed to have a stable value, such as fiat currency or gold.
How each of these tokens is treated and taxed by HMRC is dependent on their nature and use, not on their definition.
How Does Crypto Tax Work in the UK?
Anyone, individual or business, who holds cryptocurrencies in the UK will be taxed on any profits made. The most common form of taxation on cryptos is Capital Gains Tax (CGT). This tax is the difference between the value of the crypto when you first bought it and how much you sold it for eventually.
You only pay CGT on your overall profit above the Annual Exempt Amount, which for 20/21 is £12,300. Contact TS Partners to find out how we can help you calculate your earnings and CGT.
You are required to pay either 10% or 20%, depending on your income. Crypto Capital Gains Tax limits and bands apply the same way they apply to fiat currency.
Do I Pay Income Tax on Cryptocurrency?
There are circumstances where an individual will have to pay income tax on their cryptocurrencies. These are exceptional cases when HMRC views an individual’s activities as “trading” and comparable to that of a business, and thus, viewed as a form of generating income.
Profits from trade are subject to income tax in the UK, up to 45% depending on the amount of income. Activities such as mining, stacking, and being paid in cryptos can be subject to income tax.
Do I pay Tax if I Don’t Trade Cryptocurrencies?
The short answer is No. HMRC is only interested in profits made from cryptocurrencies. If you store but don’t trade cryptos, there is no gain, and therefore, no need to pay taxes on crypto.
Do Businesses Pay Crypto Tax?
Crypto tax is more complex for businesses that trade in cryptocurrencies. Your company may be liable to pay CGT, Income tax, Corporation Tax, Stamp Duties, and VAT, depending on the types of crypto transactions involved. Activities that are subject to paying tax on crypto for business include:
- Trading exchange tokens
- Exchanging tokens for other assets, including other cryptos
- Providing a service or product in exchange for cryptos
Planning for Crypto Tax
Apps and websites dealing with the exchange of cryptocurrencies may only keep a record of your transactions for a short period. Furthermore, because the industry is constantly expanding and changing, you may find that the app or website no longer exists when you come to file a tax return. Therefore, as an individual or a business, it is up to you to keep a record of each transaction.
Planning for crypto tax is similar to any other tax. Make sure you have enough to pay your bill! But knowing what HMRC asks from crypto traders will make planning easier. Here are the details HMRC expect from individuals and businesses alike:
- Type of cryptocurrency/asset
- Dates of every transaction
- Whether you sold or bought crypto assets
- The amount involved in each transaction
- The value (in GBP) of each transaction
- The cumulative total of the investment units held
- Bank statement and wallet address – could be needed for a review or an enquiry
At TS Partners, we can help you find and organise all the required information to present your claim to HMRC. We can even file the crypto tax return on your behalf, ensuring you pay the right amount on time. In addition, we recommend you subscribe to a service such as Koinly to generate the tax reports we will need – it simplifies the reporting and is well worth the subscription fee.
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