Unless you’ve been living under a rock for the past few years, then avoiding any mention of cryptocurrency has been a bit of a challenge lately. As the pandemic continues, talk of the digital asset has only increased, with the number of cryptocurrency users shooting from 52 million up to almost 75 million in the past year alone.
From the rise of Dogecoin earlier this year to the likes of Elon Musk and Mike Tyson dipping toes into the crypto pool, it’s certainly a hot topic right now. However, whether you’re new to the world of cryptocurrency or you’ve just misunderstood the small print, then you may be in for a shock. Cryptocurrency is not “free money” or any sort of lottery. Likewise, if you’ve made some gains from your crypto assets over time, then you could be looking at a hefty tax bill sometime soon.
That’s right: cryptocurrency is not tax-free. To help clear up some of the confusion and misconceptions that surround it, we’ve created this guide on how to pay cryptocurrency tax in the UK, along with a host of other key crypto topics below.
What is cryptocurrency?
Cryptocurrency (or crypto assets) are digital currencies that can be transferred, stored or traded electronically. Technologically advanced in nature, they’re secured by cryptography, which makes them near-impossible to counterfeit or double-spend.
Because of this, it’s easy to see why crypto assets have caught the attention of HMRC over the last couple of years. And because the underlying technologies of crypto are always evolving, their actual tax treatment continues to be developed too.
Because of this, HMRC tends to apply the most appropriate tax provisions on a case-by-case basis.
How to buy cryptocurrency
If you’re looking to get in on the crypto action, then you’ll need to pick a crypto exchange to open your account in. These are essentially digital marketplaces where you can buy and sell cryptocurrencies for other digital currencies or conventional money. Crypto exchanges differ in their currency offerings, user-friendliness and perks, so a bit of prior research will definitely be needed before you make your choice.
To keep you in control of your crypto, you’ll then need a personal crypto wallet which you can place withdrawn crypto from an exchange, peer-to-peer or ATM into. This wallet can be installed on desktop computers, laptops, tablets and even your smartphone.
Your wallet has its own private key to ensure it remains fully protected. In addition, you also have a public key, which is kind of like a public email address that you can freely give out to receive gifts and payments.
There are even web-based wallets, so you can access your cryptocurrencies and other digital assets wherever there’s an internet connection.
Whichever way you choose to store it, its main function remains; the wallet notifies the crypto exchange or other source that you wish to send and receive transactions.
From here, you can purchase your chosen crypto and withdraw the currency into your wallet with a QR code. Leaving your crypto in an exchange is not recommended since it can be hacked.
Essentially, if your crypto isn’t in your personal possession it will generally be subject to hacking. That’s why a wallet with its own private key is a must. After you’ve successfully withdrawn your currency from the exchange, you’ve successfully purchased cryptocurrency.
Perhaps the most important thing to remember about cryptocurrencies is that they are speculative investments. They should only be made if you’re willing to accept fluctuations in price and a risk of losing what you’ve previously purchased.
Do I need to pay tax on cryptocurrency in the UK?
Put simply: yes. It’s a myth that the disposal of crypto assets (i.e., selling your crypto assets for real rather than digital money) falls outside of UK taxation on the basis that the profits or gains that arise from it are much the same as winnings from gambling or the lottery.
Anyone in the UK who holds crypto assets as a personal investment will be taxed on any profits made on these assets. With that in mind, you only must pay capital gains tax on overall gains above the annual exempt amount.
Any crypto received as salary from an employer, as well as cryptocurrencies received from mining, airdrop, and confirmation rewards will also be taxed. Crypto assets donated to charity do not apply to capital gains tax unless the donation is more than the acquisition cost.
According to HMRC, the capital losses from cryptocurrency can be considered for the tax liability. Those selling the crypto for a loss can also deduct the loss to reduce the overall capital gain. In addition, exchanges of crypto for fiat money (currency that a government has declared to be legal tender) or crypto for another crypto are both taxable events.
Think of it like a shares portfolio: if you make a profit from your crypto assets, it’s going to be liable for tax.
How do I pay tax on cryptocurrency?
HM Revenue & Customs published guidance in December 2019 explaining how these transactions should be taxed. For individuals, anyone selling crypto assets will be subject to capital gains tax (CGT) on their profits, which needs to be reported on their self-assessment tax return.
If you don’t file tax returns then you must register with HMRC. The deadline for doing so is six months from the end of the relevant tax year. In this case, before 6 October 2021 for the current tax year.
HMRC does not categorise crypto assets, whether it’s Bitcoin, Ethereum or Ripples, as money or currency. Rather, they group them into three distinct categories:
- Exchange tokens: Also known as general cryptocurrencies, the value of these is solely based on their exchange or investment uses. In other words, they’re intended to be used as a means of payment
- Utility tokens: Such tokens allow the holder to gain access to goods and services on a platform, usually using DLT (Digital Ledger Technology). Utility tokens are provided by businesses that have accepted the tokens as payment for the goods and services in the operation
- Security tokens: Issued to a holder to fulfil the particular interests of a business, security tokens may be given under matters relating to ownership rights, money repayment or entitlement to a share of business profits
Keep in mind that although these definitions are useful to label the different tokens you hold, the tax treatment depends on a case-by-case basis of each token.
Additionally, there are some circumstances where HMRC may see an individual’s activities in buying and selling crypto assets as “trading”. For UK tax purposes, profits from a trade will be subject to income tax, not capital gains tax.
With that said, it’s rare for individuals to be seen as trading in crypto assets. Be sure to obtain advice from HMRC on your specific circumstances if you’re ever unsure about the correct UK tax treatment.
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