Close form

Do I need to pay tax on my cryptocurrency gains?

4 August 2021
Mark Friend
Reducing Tax

Over the last few years the number of people buying and selling cryptocurrencies has increased significantly.  Is it any wonder given the significant potential gains which individuals can make! Bitcoin hit a record high of $65K in April 2021 (falling to $38,073 at the time of writing this blog on 3rd August).

The rollercoaster ride of up and downs has made a number of individuals significant profits (and losses!) but what about the tax?

Yes, tax is due on gains. The losses can come in useful too!

The rules for the taxation of cryptocurrencies in the UK is detailed here.

In simple terms for UK resident individuals, gains or losses on cryptocurrencies are dealt with under the capital gains tax regime. The gain or loss is calculated as the proceeds in £ sterling minus the cost in £ sterling.

This is relatively straight forward if you have bought and sold a cryptocurrency as a one off. Unfortunately most individuals don’t do this and buy holdings of cryptocurrency at varying times and similarly sell cryptocurrency at varying times. To determine the cost value of any cryptocurrency sold you have to use the share matching rules as set out by HMRC.

In addition actually identifying disposals can be difficult. If you move from one cryptocurrency to another then you have effectively disposed of the original currency leading to a gain or loss on disposal. The gain or loss cannot be rolled into the new currency. If you use the cryptocurrencies to pay for assets or services, this is also a taxable disposal of the currency. Similarly gifting the currency can create a taxable disposal.

Other complications include the conversion rate of the sales to £ sterling. This isn’t always easy to do. Also not all expenses are tax deductible. Accounting for cryptocurrency sales is not straight forward and due to its complexity can be extremely costly to get right.

The good news is that there is a chance that no tax will be due, but you have to look at all your chargeable asset disposal in total. So this includes property, stocks and shares etc. If the total of all your disposals including cryptocurrencies for the tax year 2020/21 is less than £49,200, and gains are less than £12,300 there is no need to report the cryptocurrency disposals, unless a capital loss needs to be claimed. If you exceed the limits then you will need to declare the disposals on a self assessment tax return and pay capital gains tax. The rate of tax you pay will either be 10%, 20% or a mix of each, depending on your income in the year of disposal.

If you make losses on your cryptocurrency disposals these should be available to set against capital gains of the same or future years.

In rare situations the above treatment is not applicable and HMRC take the view that you are trading in cryptocurrency. In this circumstance all your profits will be liable to income tax and national insurance, usually giving rise to significantly higher tax liabilities. However HMRC state “Only in exceptional circumstances would HMRC expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself.”

There are numerous other anomalies with cryptocurrencies so we would urge you to take professional advice early on from a tax advisor and discuss with them an efficient system to record your purchases and disposals. The last thing you want is:

  • The taxman coming after you for undeclared profits.
  • Any profits you do make being hammered by professional fees.

The key is to set up a good system for recording all your cryptocurrency transactions from day one and remain organised throughout the period you are dealing with cryptocurrency.

If you are a client of Friend & Grant or looking for a new tax advisor then please contact Jan Friend to discuss the tax treatment and recording systems for cryptocurrencies.

The content in this blog is correct as at 3 August 2021 See terms and conditions.

Similar articles

houses by lake
21 January 2022

Is property still a good investment?

wning your own property is part of the culture in the UK with over 65.1% of houses owned by the households in 2019. Surprisingly, whilst we are ahead of countries like Germany and France, most European countries have extremely high levels of ownership (Italy 72.3%, Greece 75.4%, Poland 84.2%). So why the disparity? In simple terms the reason is the property rental market. In 2020 the share of households occupied by private renters hit 18.7%, so around 4.44 million households were privately rented in England in 2020.

three women sitting at table
10 January 2022

Building a great remuneration package for your team

There was a time when what salary you paid a team member was the only reward a business owner or company director had to think about when remunerating their team. However those days have long gone and most small business owners now have to view the whole package in order to attract and keep their best team members.

marketing strategy
7 January 2022

How to avoid the most common marketing trap!

As a small business owner for almost 30 years I have first hand experience of falling into what is probably the biggest trap for growing a business- taking on anything and everything! It was very much a scatter gun approach with the hope of catching something. Anything in fact! As long as they paid!!!

Our 3 step risk-free guarantee puts your mind at rest and keeps us on our toes!

FIND OUT MORE
byrant house at night office

Book Your Discovery Meeting

Are you hungry for success? If you run a small to medium size business and you want to grow your sales, increase profitability and pay less tax then you have come to the right place.