As is often the case in the world, especially in the technology sectors, things are changing at an alarming rate, such that traditional assets such as gold and silver are being replaced by digital equivalents.
I am of course talking about cryptocurrencies, or rather ‘cryptoassets’ (as we also now have Non Fungible Tokens – NFTs) as HMRC prefers to call them.
The article explores the UK tax implications of dealing with and trading in Crypto.
What is a cryptocurrency?
The definition according to HMRC is: “Cryptoassets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be:
- traded electronically”
Despite them largely being designed for utilisation as a form of digital currency, HMRC does not view them as ‘money’ or ‘currency’ and instead chooses to view them as assets.
Trading vs. Investing
Transacting in cryptocurrencies is generally referred to as ‘trading’ cryptocurrencies, but this doesn’t automatically make you a trader for tax purposes.
In order to fall into the ‘trading’ category, your income generated from the buying and selling of the cryptocurrencies will likely be your primary source of income. This in turn will mean that total profits will be treated as charged to Income Tax, rather than Capital Gains Tax (CGT).
The vast majority of individuals will fall into the ‘investing’ category and as such will be holding an asset with the intention of making a capital gain, thereby being subject to CGT on their gains.
As the majority of individuals will be ‘investing’ in crypto, the remainder of this article will focus on the tax implications of this.
Capital Gains Tax
The amount you pay for cryptocurrency will be your base cost for tax purposes.
The world of cryptocurrency is a volatile one, so it is not uncommon to incur losses in a year. These losses can be offset against gains in future years.
For tax purposes in the UK, cryptocurrency assets should be treated in the same way as stocks and shares by having their costs pooled together. This means that specific ordering rules must be applied to their purchase and sales.
As an example, let’s say that you purchased 10 Bitcoin in 2017 for £10,000 (£1,000 each) and then bought another 5 Bitcoin in 2020 for £35,000 (£7,000 each). This would leave you with a pooled (or average) purchase cost of £3,000 per Bitcoin. If you were to sell 1 of these Bitcoin for £20,000 in 2021, your gain would be £17,000:
|Date||No. of Bitcoin||£|
|2017||10 (£1,000 per Bitcoin)||£10,000|
|2020||5 (£7,000 per Bitcoin)||£35,000|
|15 (£3,000 per Bitcoin)||£45,000|
|2021||Sale – (1)||£(3,000)|
|14 (£3,000 per Bitcoin)||£42,000|
There are fees that are tax deductible when calculating the capital gain, such as:
- Fees paid for having the transaction included on the distributed ledger,
- Exchange fees related to the acquisition or disposal of cryptocurrencies.
Foreign exchange fees for converting to or from, for example, GBP to USD are not allowable for tax purposes. These may be incurred when initially depositing to, or extracting from, an exchange that only operates in USD.
Negligible value claims
If you lose or misplace cryptocurrency, this does not trigger a capital loss for CGT purposes. If you hold cryptocurrencies which are now worthless, then a negligible value claim could be made. This will result in a capital loss which can be offset against future gains. However, the cryptocurrencies must have been of value when bought and if during the time of ownership the cryptocurrency fell in value this must be proved – if HMRC ever queries in the future.
Points at which transactions become chargeable events
If you use cryptocurrency to buy / sell in other markets, this can trigger a chargeable event. For example:
- Exchange one cryptocurrency for another (for example, trading Bitcoin for another cryptocurrency) – you are realising a capital gain for the Bitcoin that you are disposing of, (this is often a point that is missed)
- If you make a purchase with cryptocurrency (such as buying a car with some Bitcoin) – again, you are realising a capital gain for the Bitcoin that you are disposing of,
- Even being paid in cryptocurrency by an employer instead of in regular currency – you are receiving an asset which has a value which will be the base cost for a future disposal.
The proceeds to use in a capital gains calculation is the value of the asset that you are acquiring with your cryptocurrency (which is the deemed disposal).
It is therefore recommended to keep detailed records of all the cryptocurrencies you buy or sell.
The cryptocurrency sector is an extremely fast-paced one and HMRC is aware of them being more widely used, including as replacements for traditional currencies, so expect close scrutiny in the future.
If you have any questions about any potential tax implications relating to cryptocurrency, or would like further advice, please do get in touch and our specialist tax team will be happy to help you.