Cryptoassets – How to navigate the tax minefield
Investing and trading in Cryptoassets has become an increasingly popular activity in the UK and globally. With this activity, there comes gains and losses, as well as tax.
Knowing when taxable events have been triggered can be extremely difficult, due to the complexity of the taxable events.
In this guide we breakdown:
- The different attitudes to tax
- The current tax rates for cryptoassets taxation
- Considerations to make when dealing with Crypto
If you have any queries regarding your specific holding or trade, please reach out to a member of our team.
It’s important to note that HMRC reference digital currency as ‘Cryptoassets’. Cryptoassets are assets or items of value that exist digitally and are created by software. They can be transferred, stored and traded electronically.
The main types of Cryptoassets recognised by HMRC are:
- Exchange tokens (better known as cryptocurrencies or coins).
- Utility tokens.
- Security tokens.
Understanding the multiple tax points (taxable events) is vital in maximizing your tax position.
The most common Taxable event triggers are:
- Receiving Crypto
- Exchanging Crypto
- Gifting Crypto
- Staking Crypto (in some cases)
When you don’t pay tax
- Buying crypto with GBP/USD/Etc.
- HODLing crypto. (Holding Crypto)
- Transferring crypto between your own wallets.
- Donating crypto to charity.
Gifting crypto to your spouse. (Use this to your advantage
DIFFERENT ATTITUDES & AWARENESS TO TAX.
There are 5 Crypto ‘Users’ with different attitudes and awareness towards Crypto Taxation.
HMRC’s Attitude & Awareness
In general, HMRC take the view of taxing under capital gains tax (CGT) rates.
This is due to most individuals holding cryptoassets as a personal investment to profit from on disposal. In those circumstances when the cryptoasset are sold HMRC would seek to recover CGT on the profit.
The actual tax treatment will depend on each individual scenario. In some situations, the profit could be taxable under income tax or even PAYE in some instances.
HMRC has a strong awareness of the taxpayer requirements. They have access to a data sharing program with all UK exchanges, crypto transaction data from as far back as 2014 and all the KYC information you provided when signing up for any UK exchange or wallet. In the last year, HMRC ‘nudge’ letters have been sent to encourage individuals and companies to report their gains.
This led to an increase in HMRC investigations surrounding individuals and companies cryptoasset affairs. This will continue to increase in future.
Hobbyists Attitude & Awareness
Hobbyists do not make up the majority of cryptoasset users anymore (down to 50%). As the popularity of crypto has rose, the methodology pushing the trading and investment plans has evolved in complexity. This causes recategorization of some “hobbyists” to “traders”.
The attitude of the hobbyist is that all their gains are subject to CGT and that only physical gains from transferring crypto to fiat currency is taxable. This is not the case. Hobbyists have the lowest awareness to their tax points (taxable events) and liabilities of all the crypto users.
Trader’s Attitude & Awareness
The attitude of the trader is similar to that of a hobbyist. In that some cases they belief they should still be taxed under CGT. This situation makes up the majority of HMRC investigations.
The awareness of what constitutes a trader, is the biggest issue. There is an extreme lack of guidance on this from HMRC. Most traders are aware of their responsibilities but believe that HMRC, ‘don’t know what I’m earning’.
Accountant’s Attitude & Awareness
Accountants have a neutral approach to the taxation element applicable. As it doesn’t directly impact on our pocket like it does for HMRC and Investors.
In the view of an accountant, there is usually an element of tax to pay (with the exception of losses). Which can often be reduced dramatically with appropriate planning and structuring.
It’s not one size fits all though and the difficulty is assessing each individuals situation.
“Gamblers” Attitude & Awareness
Many have argued they are gambling with crypto trading as it results in no taxable gain.
To date, there have been no successful cases of individuals arguing their trading as gambling. It would be difficult to sustain this argument mainly because the Cryptoassets market has become more sophisticated, and the taxpayer would have to show they are transacting in the market blindly.
HMRC state in their manual they do not consider the buying and selling of Cryptoassets to be the same as gambling.
TAX LIABILITIES – CAPITAL GAINS/LOSSES
Capital Gains Tax will be charged at a rate of 10% or 20%.
The taxable amount will be the profitable gain from any disposal. A disposal will arise when tokens are sold, exchanged for a different type of token (including stablecoin transactions, used to pay for goods/services or gifted (except for transfers between spouses).
The disposals of cryptoassets will be matched with purchases in a particular order as follows:
- Same day purchase and sale rules.
- Sale and purchase of cryptocurrency occurring within 30 days.
- General pooling rule.
Losses arising on disposal will be available to offset against capital gains in the same year or carried forward and offset against future gains.
The amount of Capital Gains Tax you will need to pay depends on how much you earn.
The rates for 2022-23 are:
|Tax Rate||Earnings Bracket|
|10%||Basic Rate Income Band (up to £50,270)|
|20%||Higher Rate Income Band (up to £150,000)|
|20%||Additional Rate Income Band (more than £150,000)|
To calculate the Capital Gains Tax to pay:
- Work out the Cost Basis – First you’ll need to add the original price that you paid to buy your crypto and any transaction fees you incurred – this is known as the Cost Basis.
- You can then subtract the Cost Basis from the price you sold (or intend to sell) your crypto for. If you have a profit you will need to pay Capital Gains Tax on this.
- You can then deduct your capital gains allowance of £12,300 from your profit and apply your tax rate based on the table above to calculate your Capital Gains Tax charge.
- If you made a loss you won’t need to pay Capital Gains Tax, but you should keep good records and register your losses with HMRC, as they can be offset against other capital gains or carried forward to be offset against future gains.
TAX LIABILITIES – INCOME TAX
For a taxpayer to be trading in cryptoassets they would need to show:
- They have a trading strategy and that their transactions are in line this.
- They have a deliberate intention of profit making.
- They have clear methods of planning and organization.
If a trade exists, the profit will be subject to income tax at a rate of 20%, 40% or 45% depending on circumstances for sole traders or 19% for limited companies.
Similar to CGT, if losses arise traders will be allowed to offset against future trade profits or other income.
What is taxed directly as income?
- Staking rewards
- Mining tokens
- Getting paid in Crypto for a service (see further on for PAYE payments in Crypto)
- Airdrops – in most instances.
HMRC guidance states that DeFi transactions may be subject to Income Tax or Capital Gains Tax depending on the “nature of the transaction” and whether that transaction has the nature of capital or the nature of income – Useless.
In general, Income Tax will only apply to ‘returns’ from activities, so rewards from staking, yield farming, lending etc. could be considered income. HMRC say it’s likely to be considered income if:
- The return to be received has been agreed.
- If the return is paid by the borrower/DeFi platform.
- If the return is paid periodically throughout the period of lending/staking.
If you need to pay Income Tax on the money you made from crypto, it will count towards your Income Tax.
The UK Income Tax Bands for 2022-23 are:
|Tax Rate||Earnings Bracket||Detail|
|0%||Up to £12,570||Personal allowance|
|20%||£12,571 – £50,270||Basic rate|
|40%||£50,271 – £150,000||Higher rate|
To work out the rate of tax that you will need to pay, you must add your crypto income to your regular income, then apply the tax rates shown in the table above.
Please note that this means you only pay the specified tax rate on that portion of income. For example, if your income puts you in the 40% tax bracket, then you only pay 40% tax on the segment of earnings in that Income Tax band. For the lower part of your earnings, you’ll still pay the appropriate 20% or 0%.
PAYE taxation is still very rare to find in the market. This situation will arise when cryptoassets are received as remuneration for employment.
Applicable taxes for the recipients are deducted at source by your employer, under the PAYE rates of income tax and National insurance.
WHAT CRYPTO RECORDS DO I NEED TO KEEP FOR HMRC?
Many exchanges do not keep detailed information about crypto transactions, so HMRC has said that the onus is on the individual to keep their own records for each cryptoasset transaction. These must include:
- The type of cryptoasset
- Date of the transaction
- If they were bought or sold
- Number of units involved
- Value of the transaction in GBP (as at the date of the transaction)
- Cumulative total of the investment units held
- Bank statements and wallet addresses, as these are needed for an enquiry or review.
Reporting crypto taxes to HMRC
The UK financial year runs from the 6th April to the 5th April the following year.
You will need to declare your crypto taxes in your Self Assessment tax return, which must be filed by the following 31st January (for online returns).
For example: For a crypto capital gain incurred on 1st June 2022 it must be reported in your Self Assessment tax return filed by 31st January 2024 for online returns (or 31st October 2023 for paper returns).
Once you’ve filed your Self Assessment Tax Return with HMRC reporting your crypto gains and/or income – HMRC will confirm how much tax you owe on your crypto and when this must be paid.
CRYPTO TAX FOR BUSINESSES AND COMPANIES
If you are running a business or company that involves cryptocurrency transactions (such as buying, selling, mining or selling goods in exchange for crypto), then the rules are more complex.
It may also mean that you are liable to pay a number of different taxes such as Capital Gains Tax, Income Tax, Corporation Tax, Stamp Duties and even VAT depending on the type of transaction.
CONSIDERATIONS TO MAKE WHEN DEALING WITH CRYPTO
Tax Planning considerations
- SD is unlikely to be charged on cryptocurrency. However, Stamp Duty Reserve Tax (SDRT) may apply if exchange tokens are given as consideration. Usually at a rate of 0.5% on the transaction.
- Methods to reduce tax rates:
- Limited Company structure or Individua structure?
- SSAS Pensions and Director Loan ISAs
U.K. RESIDENCY AND U.K. DOMICILE
HMRC’s current view is that cryptoassets are located where the beneficial owner is resident. Therefore, cryptoassets owned by an individual or company resident outside the UK will be a non-UK asset. Whereas any held by a UK resident (regardless of domicile) will be a UK asset for tax purposes.
There is no legal basis for this assessment, therefore it remains complex to predict the outcome of any tribunal cases which may arises regarding this.
If you want to get the most from your crypto activities, please do get in touch. Our crypto tax specialists will guide you through the tax minefield to help minimise your tax liabilities and maximise your take home.