Do I need to pay tax on my cryptocurrency gains?

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.