Cryptocurrency - not really a currency in the eyes of the Treasury
A recent survey by HMRC showed that over 10% of the UK population has invested in cryptocurrency. Everybody has a view on whether investing in cryptocurrency is a good or bad idea, and even though there were some quite frightening headlines in 2022 about cryptocurrency, it remains a popular alternative to traditional financial investments.
Do I have to pay tax on my cryptocurrency investments?
The first thing you need to understand is that cryptocurrency is not classed as currency by the Treasury or HM Revenue & Customs (HMRC). They are instead regarded as assets, similar to shares, hence the term Cryptoassets. This means that when cryptoassets are purchased or sold, there are tax consequences that need to be considered.
Cryptoassets are usually taxed under the capital gains tax (CGT) regime, and therefore a disposal of cryptoassets will result in a taxable event. In very rare circumstances the individual could be classed as ‘trading’ and instead be liable to income tax, but this is uncommon.
Need to talk to a specialist cryptoasset adviser?
If you’re concerned about your crypto investments, particularly in relation to the tax treatment, please get in touch.
How are cryptoasset tax gains calculated?
Tax gains will be calculated by taking the proceeds from the sale and deducting the original cost of the cryptoasset being sold. This gives the taxable gain that needs to be reported on a tax return.
There are some special rules that are applied to the costs to ensure the correct cost is being attributed to the correct sale. This is necessary due to cryptoassets being fungible. Fungible means that you cannot tell one cryptoasset token apart from another.
The costs are matched as follows:
- All cryptoassets acquired on the same day
- All cryptoassets acquired in the following 30 days
- The average cost of all cryptoassets tokens of the same type (known as the pool)
Each taxpayer is currently given an annual exemption of £12,300 (2022/23), which means that the first £12,300 of gains is not taxable. However, from 6 April 2023 this will be reduced to £6,000, with a further reduction to £3,000 from 6 April 2024.
All taxable gains exceeding the annual exemption will be taxed at either 10% or 20%. The rate applied will depend on the level of gains and level of other personal income the taxpayer has during the year. If the gains and income do not exceed the basic rate band (currently £50,270), the 10% rate will be applied. Where income and gains exceed the basic rate band, the 20% rate will be applied.
The cryptoassets landscape is constantly evolving and HMRC rules are not built to deal with something like this. This means that whilst the general principles stated are quite straightforward to follow, care needs to be taken to ensure that the correct treatment is being applied to your transactions.
How does HMRC know about my cryptocurrency?
The whole point of the crypto framework is that is it untraceable and secure so how would HMRC know that you need to file a tax return?
HMRC has sent information requests to UK-based crypto exchanges to ensure tax compliance. What they are hoping to achieve from this is a list of consumers that they can then target to ensure they are reporting their crypto gains correctly.
Additionally, the Organisation for Economic Cooperation and Development (OECD) launched a consultation with the aim of setting up a new global tax transparency framework for the exchange of information on cryptoassets. A similar framework has been successfully set up for income sharing for globally mobile taxpayers which suggests this attempt will be successful.
My crypto made a loss so I can't have any gains
At Forrester Boyd, we have noticed that there is a common misconception that if you haven’t taken any physical money out such as GBP or USD, there can’t be any gains. Unfortunately, this is not true; gains can arise even when you think you have made losses overall.
2013 |
One Bitcoin purchased for £80 |
|
2020 |
Bitcoin swapped for 60 ETH worth £6,000 |
Crystallised gain £5,920 |
2021 |
ETH swapped for 5,526 LUNA worth £210,000 |
Crystallised gain £204,000 |
2022 |
LUNA crashes – value 0.000135 per token |
All has been lost, however the gains have been crystallised. |
While the losses sustained will reduce the gains payable, they do not remove the need for the gains and losses to be reported to HMRC via a tax return.
Losses are only crystallised when the asset that has sustained the loss is sold so that the loss can be evidenced. The reason for the matching rules above is so that taxpayers cannot sell the tokens, crystallise the loss, then purchase the same amount again whilst they still have a low value. Due to the matching rules, the proceeds of the sale would be allocated against the cost of the most recent purchase – effectively making that transaction nil with no gain or loss. The original tokens would still be sat with the original cost allocated to them.
In rare cases where the token has completely crashed and there is almost no prospect of it recovering, taxpayers can make a negligible value claim where the loss is crystallised without the tokens needing to be sold. This would be the case with LUNA where most exchanges suspended trading.
Do staking rewards or other DeFi activities get taxed too?
Yes, staking rewards are taxed under income tax rather than the capital gains tax regime. If you do not have another trade you may be able to claim the trading allowance against the income earned from your DeFi activities.
Depending on the circumstances of your DeFi activity, it may fall under the CGT regime due to controversial guidance released by HM Revenue & Customs in February 2022. This is a difficult area to navigate and we would recommend getting in touch for some advice if you have participated in Defi activities.
Do I need to report cyptoasset losses to HMRC?
Yes, you should do this. It is also important to remember that losses are not recognised by HMRC unless they are reported. Therefore, taxpayers that only have losses should still report them to ensure they can be carried forward to be used against future gains.
We have cryptoasset specialists who can guide you step-by-step to report your cryptoassets gains and losses to HMRC and prepare your tax returns. Get in touch today if you would like to discuss this with one of our specialist advisors.
How do I report my cryptoasset gains and losses?
Your gains are reported on a self-assessment tax return to HMRC. This will need to be filed for each tax year end. The tax year ends on the 5th April and the return needs to be filed by the 31st January following the year end. The tax will also need to be paid by this date. A registration form will need to be sent to HMRC to let them know you need to file self-assessment tax returns. We can help you with this.
