It’s just as important to get your tax right on cryptocurrency investments, as it is on your other tax liabilities.
But which one do you pay on cryptocurrency income? Here’s our simple introduction to UK tax on cryptocurrency for individuals.
Cryptocurrency and UK Tax Myth
There is a widely held and completely false belief that money made from cryptocurrency is treated like a gambling win. That it’s ‘outside the scope’ of UK tax laws. This is simply not true. And the fact that you’re asking, ‘which tax do I pay?’ is a very good sign. It means that you are aware that there is indeed UK tax to pay on your cryptocurrency earnings, but you’re not sure which tax.
Cryptoassets, not cryptocurrency
HMRC doesn’t call cryptocurrency, ‘cryptocurrency’. Its definition is ‘cryptoasset’. And this is an important distinction that directly affects the accompanying tax treatment.
In HMRC’s internal manual ‘CRYPTO10100 – Introduction to cryptoassets: what are cryptoassets’, they are defined as:
“Cryptoassets (also referred to as ‘tokens’ or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be:
- transferred
- stored
- traded electronically”
This goes on to say that all cryptoassets use Distributed Ledger Technology (DLT). And that there are different types of tokens like: exchange tokens, utility tokens, stable coins and security tokens. This is broken down into more detail in the Cryptoassets Task Force’s Final Report.
Crucially, HMRC does not consider cryptoassets to be either money or currency.
The fast-paced nature of change in the cryptocurrency world is acknowledged through all government documentation. Making it clear that they will make changes to policy as it’s required, to keep up with its evolution.
What does this mean for my tax liability?
As an individual, you must pay Capital Gains Tax (CGT) on any profits you make when you sell cryptoassets. This includes exchanges of one type of crypto for another – for example, buying Bitcoin with Ethereum.
Capital Gains Tax is payable on any profits you make when you ‘dispose’ of an asset. So if you’re simple sitting on cryptoassets as an investment and you don’t sell it, there is no disposal and therefore no CGT to pay.
How do I declare any cryptocurrency profits?
You need to record your cryptocurrency profits on a self assessment tax return. If you’re not already part of the self assessment process, you need to get registered with HMRC. And you need to do this six months before the tax year in question ends.
You then pay the tax you owe by the self assessment tax payment deadline. This is 11.59pm on 31st January after the tax year ends. For example, for the 2019-20 tax year, the tax payment deadline was 31st January 2021.
Did you know that there’s a tax free Capital Gains Tax Allowance?
Taxpayers can make up to a certain amount each tax year without having to pay Capital Gains Tax. This is called the Capital Gains Tax Allowance. For the 2020-21 tax year, the CGT Allowance rate is £12,300. Once you earn profits over this amount, you get charged CGT at a rate of either 10% or 20%, depending on your income tax band.
So I never have to pay income tax on what I earn from cryptocurrency?
No, you will have to pay income tax on your earnings from cryptoassets if you are trading. This is an unlikely position as an individual taxpayer.
Its up to HMRC to consider your cryptocurrency “activities” and decide if they meet the criteria for trading. They base this on factors like the how often you buy and sell cryptocurrency, and the complexity of your financial set-up.
If HMRC decide that you’re trading, as with all other trading profits, you’ll need to pay income tax on whatever you’ve made.
There’s a whole other section of guidance for crypto assets income at a business level. Look out for our breakdown in a few weeks.
Still confused?
The wisest thing to do is get in touch with HMRC directly. Then they can give you expert advice based on the specifics of your situation. Contrary to old-fashioned ‘tax man’ stereotypes, they are there to help us, not just collect taxes.