The Bitcoin bubble may have burst temporarily, but the sharp rise of its value in 2017, and the dramatic decline of 2018 brought it to the public’s attention with many people with little investment knowledge putting their savings into the cryptocurrency.
However, when it comes to investing you should always be aware of your tax implications. When you spend your life on PAYE, it is easy to forget that you should do tax returns on personal investments. If you were lucky enough to buy low and sell high with Bitcoin that could mean you are on the hook for a large tax bill, and if you don’t declare it a larger fine. I am not an accountant or tax expert so please consult a professional before declaring any tax.
In December 2018 HMRC published guidance on the taxation of cryptoassets. HMRC confirms that:
- Most investors will be subject to CGT on gains and losses.
- HMRC does not consider cryptoassets to be currency or money.
- It will be rare for investment in cryptoassets to be regarded as trading, although ‘mining' is likely to indicate a trading activity.
- A capital loss may be claimed in the event that a cryptoasset becomes of negligible value. Evidence of any loss will need to be proved if the loss of the asset arises as a result of the accidental destruction of a private encryption key or fraud.
- Although there are thousands of different types of cryptoassets in existence, it seems unlikely that HMRC would accept that buying and selling the most popular versions of these assets is a gambling activity.
Furthermore, Individuals will be liable to pay Income Tax and National Insurance contributions on cryptoassets which they receive from:
- their employer as a form of non-cash payment
- mining, transaction confirmation or airdrops. Airdrops are when someone receives an allocation of tokens or other cryptoassets. If this is done in return for a service, it will incur income tax
In regards to the mining of cryptocurrency, this is when a computer has been used to solve complex maths problems and you are rewarded with the cryptoassets. The following provides an explanation of how it works.
Any cryptoassets awarded for successful mining will be taxable as income (miscellaneous income) with any appropriate expenses reducing the amount chargeable.
With the volatility of cryptocurrencies, it could be that you have made a net loss and in this case you may be able to reduce Income Tax liability by offsetting any losses from trade against future profits or other income. So if you made a large loss in 2018 you could possibly offset your tax for 2019.
Most people will pay capital gains tax
In general, the vast majority of people will be liable to capital gains tax if your investment has appreciated in value and you have drawn down from the profits.
With capital gains tax you may be best consulting an accountant but any gains you make within the basic Income Tax band you’ll pay 10%. You’ll pay 20% on any amount above the basic tax rate. If you are on a low income, then your gains can be part of your tax-free allowance of £11,700 (2019). So, if you only earn £8000 per annum but then make £5000 capital gains, you would need to pay capital gains tax on the £1300 over the tax-free allowance.
For the most part, you will not have to worry about VAT when it comes to cryptocurrency. The exception being if you accept cryptocurrency as payment for goods or services and you are a VAT registered business.
Don’t avoid declaring your profits
It is also worth noting that it is hard to hide profits from the HMRC due to their bulk data gathering powers. The HMRC can and will gather data from most UK broking platforms and there are data sharing agreements with over 100 other countries.
The UK treasury also announced plans to bring cryptocurrencies AML rules and counter-terrorism financial legislation. This will force traders to disclose their identities and report suspicious activity. These rules should now be enforceable across the EU.
Records to keep
Anyone that is self-employed will know they need to keep receipts and invoices for everything, and this applies to your investments too.
You must keep separate records for the cryptocurrency you receive, including:
- type of cryptocurrency
- date you received them
- number of cryptocurrency you received
- number of cryptocurrency you have in total
- value in pound sterling
- bank statements
- the date you disposed of the cryptocurrency
- You may also want to keep other records such as wallet addresses.
HMRC might ask to see your records if they carry out a compliance check.
If you have made a profit from investing in cryptocurrency then congratulations but if you have cashed out these profits there is a good chance you need to pay between 10-20% capital gains tax. If you have made a significant profit, I would highly recommend consulting an accountant to ensure your tax return is accurate.