Recent research has shown that despite volatility with cryptocurrencies, as many as one in 10 of us has dipped into the crypto market.
As the values of some cryptocurrencies like Bitcoin have soared, it has allowed many people to make substantial financial gains.
This inevitably brings HM Revenue & Customs (HMRC) into the picture, with its compliance officers using data-gathering powers to identify potential tax avoidance offenders.
Tax liabilities depend upon the way the profit was gained and the circumstances of the business or individual which means that buying or selling using cryptocurrency – or acquiring cryptocurrency as an investment – could result in a liability to Income Tax, Capital Gains Tax (CGT), or Inheritance Tax (IHT).
How to remain compliant
If you have achieved cryptoasset gains that are liable to CGT, you will need to report this on a tax return and pay the arising tax by 31 January following the end of the tax year in which they arise.
If you do not usually complete tax returns it is necessary to register with HMRC within six months of the end of the tax year.
When calculating CGT payable on cryptoassets, the standard CGT tax exemption is available, entitling every taxpayer to annual gains of £12,300 before any tax is payable. Anything above that figure is subject to taxation.
Just like other assets, cryptoassets can be given away as part of a lifetime gifting strategy.
They are considered to be property for the purposes of IHT and will form part of an individual’s estate. However, because of the volatile nature of the market, any gifting should be done with caution after taking expert advice. Gifts between spouses are always tax-free, as with other types of assets.
If HMRC decides that you are trading, rather than just investing, it may tax your profits as income instead of gains. This typically occurs where an individual is:
· Actively mining cryptocurrency
· Is considered a dealer due to the volume of trade they complete
· Validating transactions
· Staking and yield farming.
In all of these cases, a person is likely to be remunerated through the receipt of fees and/or further cryptoassets in return for their services. On this basis, these rewards may be subject to income tax.
Some employers are also choosing to pay staff via cryptoassets. If an employer awards cryptoassets, they are taxable as employment benefits.
Need advice on taxation of cryptocurrencies and other taxation matters? Contact us today.