Cryptocurrency is a fast-growing area for many traders and investors. The recent growth and interest within the crypto space have attracted the attention of HMRC who have updated their guidance to help ensure that those involved in cryptocurrency are paying the correct amount of tax.
“Many UK residents and businesses are unaware that cryptocurrency they hold is liable for tax in the UK,” says Rowan Morrow-McDade, chartered tax advisor and cryptocurrency tax specialist at Alexander & Co.
“It is potentially liable not only on disposal, but also on exchange and when used as payment.”
Cryptocurrencies, like Bitcoin and other cryptoassets, are taxed in different ways depending upon how they are owned, traded or sold.
How is cryptocurrency taxed in the UK?
Firstly, it is important to understand that HMRC does not view any form of cryptocurrency or other cryptoassets as a form of currency or money. HMRC guidance released in 2014 initially appeared to suggest crypto could be classed as gambling and thus exempt, but this has now been superseded and HMRC does not consider the buying or selling of cryptoassets to be a form of gambling.
To tackle the issue of how cryptoassets are taxed, HMRC has broken these down into three different types of assets.
- Exchange tokens – commonly known as cryptocurrencies, e.g. Bitcoin, Ethereum.
- Security tokens – these amount to a ‘specified investment’ as set out by the government in the Financial Services and Markets Act (2000). These can provide rights such as ownership, repayment of a specific sum of money or entitlement to future profits.
- Utility tokens – which can be redeemed for access to specific products or services that is typically provided using a distributed ledger platform.
How individuals are taxed on cryptocurrency and other cryptoassets depends on how they are used. As it is still a relatively new area, HMRC looks at the tax treatment of the tokens on a case-by-case basis and will consider individual cases for determining taxable liability.
Do I need to pay tax on cryptoassets in the UK?
Anyone who is domiciled in the UK is liable to pay tax on any cryptoassets they own. UK resident businesses are also liable to pay tax on cryptoassets.
For those domiciled in the UK, HMRC deems that any cryptoassets they hold are also located in the UK and therefore liable for UK tax. Thus, the remittance basis will not be available for any crypto gains/income.
Tax is liable to be paid when cryptoassets are traded, received as a form of payment, mined (including tax on fees earned from mining) or received as airdrops in lieu of a service (or expected service). Tax is also due when one form of cryptoasset is exchanged for another.
What taxes might you pay?
Individuals are most likely to pay Capital Gains Tax when cryptocurrency is traded, disposed or exchanged. They may also be liable to pay Capital Gains Tax when cryptocurrency is used to pay for goods and services or where these are given away to another person (other than a spouse). In rare cases, the trading of cryptocurrency will be taxable as income tax.
Income Tax and National Insurance contributions are also taxable in circumstances where cryptoassets have been received as a salary. Income tax may also be payable when cryptoassets are received through mining or through airdrops in exchange for a service or expected services.
Where Capital Gains Tax is due, if you are a higher or additional rate taxpayer, cryptoassets will be taxed at the current Capital Gains Tax rate of 20 per cent. Basic rate taxpayers will be taxed at 10 per cent, up to their higher rate threshold. An annual exempt amount (£12,300 for the 2021/22 tax year) is available each tax year for the offset of any capital gains.
Inheritance Tax may also be due in the event of death, so inheritance tax planning should also be considered.
For businesses that are involved in cryptocurrency transactions, taxation is more complex. Businesses can also be liable for VAT depending on the type of transaction.