Another common question from our clients – are cryptocurrency or crypto asset gains or profits, taxable under Capital Gains Tax?
Can you obtain tax relief if you make losses on Bitcoin?
In simple terms, gains on transactions in crypto assets are potentially taxable in the same way as other investments.
At a glance
HMRC has confirmed in its Crypto assets manual that:
Most individual investors in crypto assets and cryptocurrencies will be subject to Capital Gains Tax on gains and losses.
It will be rare to regard investing in crypto assets as trading, although ‘mining’ is likely to indicate a trading activity.
Other tax treatments rather than trading or investment may need to be considered by companies such as loan relationships and the intangibles rules.
A capital loss may be claimed in the event that a crypto asset 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.
Exchange tokens such as Bitcoin are located for tax purposes wherever the beneficial owner is resident.
VAT may need to be considered and this should be on an asset by asset basis.
HMRC does not consider crypto assets to be currency or money.
What’s new?
In December 2021 HMRC updated their guidance on Digital Services Tax (DST) to confirm that as crypto assets are not considered to be money or currency the online financial marketplaces exemption from DST will not apply to cryptocurrency exchanges. Such exchanges/platforms may be subject to DST.
In March 2021 HMRC incorporated their general guidance into a new HMRC Crypto assets manual.
In January 2022, in its Consultation outcome: Crypto asset promotions the government now proposes to extend the legal definition of controlled investments to include unregulated Crypto assets and bring them within the scope of financial promotions regulation by extending the scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). There is currently no agreed definition for unregulated crypto assets. It also proposes:
To include a ‘transferability exclusion’ and keep non-fungible tokens outside of the scope.
A proposed exemption for those offering to accept/offer crypto assets in exchange for goods/services will not be added.
A six-month transition period will be introduced.
Digital Services Tax
From April 2020 Finance Act 2020 provides for:
A 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users.
Applies only to large multi-national enterprises with revenue derived from the provision of a social media service, a search engine or an online marketplace for UK users.
Only affects groups generating global revenues from activities of over £500m a year and subject to a £25m per annum allowance.
The DST is intended to be temporary pending a global solution and will be subject to a formal review in 2025 to see if it is still necessary following further international discussions on the subject.
The HMRC Digital Services Tax manual provides examples of what types of services are and are not likely to be caught by the rules.
What’s new?
In December 2021 HMRC updated their DST guidance to confirm that as cryptoassets are not considered to be money or currency the online financial market places exemption from DST will not apply to cryptocurrency exchanges. Such exchanges/platforms may be subject to DST if they meet the definition of an online marketplace.
When you dispose of cryptoasset exchange tokens (known as cryptocurrency), you may need to pay Capital Gains Tax.
You pay Capital Gains Tax when your gains from selling certain assets go over the tax-free allowance.
You might need to pay other taxes if you receive crypto assets.
When you sell Crypto assets
You might need to pay Capital Gains Tax when you:
sell your Crypto tokens
exchange your tokens for a different type of crypto asset
use your Crypto tokens to pay for goods or services
give away your Crypto tokens to another person (unless it’s a gift to your spouse or civil partner)
If you donate tokens to charity, you may need to pay Capital Gains Tax on them.
Work out if you need to pay
To check if you need to pay Capital Gains Tax, you need to work out your gain for each transaction you make. The way you work out your gain is different if you sell Crypto tokens within 30 days of buying them.
Your gain is normally the difference between what you paid for an asset and what you sold it for. If the asset was free, you’ll need to use the market value when working out your gain.
You do not need to pay Capital Gains Tax on the value of the tokens that you’ve already paid Income Tax on. You’ll still need to pay Capital Gains Tax on the gain you make after you’ve received them.
You can deduct certain allowable costs, including a proportion of the pooled cost of your Crypto tokens when working out your gain.
You can also use capital losses to reduce your gain, but you’ll need to report them to HMRC first.
If your total taxable gain is above the annual tax-free allowance, you must report and pay Capital Gains Tax.
What counts as an allowable cost
You can deduct certain allowable costs when working out your gain, including the cost of:
transaction fees paid before the transaction is added to a blockchain
advertising for a buyer or seller
drawing up a contract for the transaction
making a valuation so you can work out your gain for that transaction
You can also deduct a proportion of the pooled cost of your tokens.
You cannot deduct costs:
you’ve already deducted against profits for Income Tax
of mining activities (like equipment or electricity)
Pool the cost of your tokens
You must group each type of token you own into pools and work out a pooled cost for each type.
You pool the cost of your tokens in the same way you pool costs for shares.
When you sell tokens from a pool, you can deduct an equivalent proportion of the pooled cost (along with any other allowable costs) to reduce your gain.
Working out the pooled cost is different if there has been a hard fork in the blockchain.
You’ll need to work out the pooled cost every time you buy or sell tokens.
When you buy tokens, add the amount you paid for them to the appropriate pool. When you sell them, deduct an equivalent proportion of the pooled cost from the pool.
You must keep records for each pool.
If you buy and sell tokens of the same type
Do not group tokens into pools if you buy them:
on the same day that you sell tokens of the same type
within 30 days of selling tokens of the same type
If you bought new tokens of the same type within 30 days of selling your old ones, the rules for working out the cost are the same as the rules for shares.
How to report and pay
If you need to report and pay Capital Gains Tax, you can either:
complete a Self Assessment tax return at the end of the tax year
use the Capital Gains Tax real time service to report it straight away
The amount of tax due might be different if you are not a resident in the UK.
If you complete a tax return, you must complete it in pound sterling.
Records you must keep
You must keep separate records for each transaction, including:
type of tokens
date you disposed of them
number of tokens you’ve disposed of
number of tokens you have left
value of the tokens in pound sterling
bank statements and wallet addresses
a record of the pooled costs before and after you disposed of them
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 receive Crypto from mining
If you receive tokens from mining and are not trading, the tokens will be treated as other taxable income.
You’ll need to complete a Self Assessment tax return in pound sterling unless you’ve received:
crypto assets worth less than £1,000
less than £2,500 from other untaxed income
If an employer pays you tokens
Check if the tokens you’re paid are classed as readily convertible assets (an asset that can be easily exchanged for cash).
If your income is a readily convertible asset
UK employers must pay your Income Tax and National Insurance contributions through PAYE before they pay you.
If they pay you in tokens, they’ll estimate the value of them, and pay Income Tax and National Insurance contributions based on the estimate. They’ll then deduct tax and contributions from other wages you receive in that period.
Your employer will pay Income Tax on your behalf if either:
you’re paid in tokens only
they cannot deduct the full amount from your other wages
If they pay tax on your behalf, you should reimburse them within 90 days of the end of the tax year.
If your income is not a readily convertible asset
Ask your employer if they’ve paid your Income Tax through PAYE. If they have not, you’ll need to pay it yourself.
To pay your own Income Tax, complete a Self Assessment tax return in pound sterling.
Records you must keep
You must keep separate records for the tokens you receive, including:
type of tokens
date you received them
number of tokens you received
number of tokens you have in total
value in pound sterling
bank statements
the date you disposed of the tokens
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.
Crypto Assets
Another common question from our clients – are cryptocurrency or crypto asset gains or profits, taxable under Capital Gains Tax?
Can you obtain tax relief if you make losses on Bitcoin?
In simple terms, gains on transactions in crypto assets are potentially taxable in the same way as other investments.
At a glance
HMRC has confirmed in its Crypto assets manual that:
What’s new?
In December 2021 HMRC updated their guidance on Digital Services Tax (DST) to confirm that as crypto assets are not considered to be money or currency the online financial marketplaces exemption from DST will not apply to cryptocurrency exchanges. Such exchanges/platforms may be subject to DST.
In March 2021 HMRC incorporated their general guidance into a new HMRC Crypto assets manual.
In January 2022, in its Consultation outcome: Crypto asset promotions the government now proposes to extend the legal definition of controlled investments to include unregulated Crypto assets and bring them within the scope of financial promotions regulation by extending the scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO). There is currently no agreed definition for unregulated crypto assets. It also proposes:
Digital Services Tax
From April 2020 Finance Act 2020 provides for:
The DST is intended to be temporary pending a global solution and will be subject to a formal review in 2025 to see if it is still necessary following further international discussions on the subject.
The HMRC Digital Services Tax manual provides examples of what types of services are and are not likely to be caught by the rules.
What’s new?
In December 2021 HMRC updated their DST guidance to confirm that as cryptoassets are not considered to be money or currency the online financial market places exemption from DST will not apply to cryptocurrency exchanges. Such exchanges/platforms may be subject to DST if they meet the definition of an online marketplace.
When you dispose of cryptoasset exchange tokens (known as cryptocurrency), you may need to pay Capital Gains Tax.
You pay Capital Gains Tax when your gains from selling certain assets go over the tax-free allowance.
You might need to pay other taxes if you receive crypto assets.
When you sell Crypto assets
You might need to pay Capital Gains Tax when you:
If you donate tokens to charity, you may need to pay Capital Gains Tax on them.
Work out if you need to pay
To check if you need to pay Capital Gains Tax, you need to work out your gain for each transaction you make. The way you work out your gain is different if you sell Crypto tokens within 30 days of buying them.
Your gain is normally the difference between what you paid for an asset and what you sold it for. If the asset was free, you’ll need to use the market value when working out your gain.
You do not need to pay Capital Gains Tax on the value of the tokens that you’ve already paid Income Tax on. You’ll still need to pay Capital Gains Tax on the gain you make after you’ve received them.
You can deduct certain allowable costs, including a proportion of the pooled cost of your Crypto tokens when working out your gain.
You can also use capital losses to reduce your gain, but you’ll need to report them to HMRC first.
If your total taxable gain is above the annual tax-free allowance, you must report and pay Capital Gains Tax.
What counts as an allowable cost
You can deduct certain allowable costs when working out your gain, including the cost of:
You can also deduct a proportion of the pooled cost of your tokens.
You cannot deduct costs:
Pool the cost of your tokens
You must group each type of token you own into pools and work out a pooled cost for each type.
You pool the cost of your tokens in the same way you pool costs for shares.
When you sell tokens from a pool, you can deduct an equivalent proportion of the pooled cost (along with any other allowable costs) to reduce your gain.
Working out the pooled cost is different if there has been a hard fork in the blockchain.
You’ll need to work out the pooled cost every time you buy or sell tokens.
When you buy tokens, add the amount you paid for them to the appropriate pool. When you sell them, deduct an equivalent proportion of the pooled cost from the pool.
You must keep records for each pool.
If you buy and sell tokens of the same type
Do not group tokens into pools if you buy them:
If you bought new tokens of the same type within 30 days of selling your old ones, the rules for working out the cost are the same as the rules for shares.
How to report and pay
If you need to report and pay Capital Gains Tax, you can either:
The amount of tax due might be different if you are not a resident in the UK.
If you complete a tax return, you must complete it in pound sterling.
Records you must keep
You must keep separate records for each transaction, including:
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 receive Crypto from mining
If you receive tokens from mining and are not trading, the tokens will be treated as other taxable income.
You’ll need to complete a Self Assessment tax return in pound sterling unless you’ve received:
If an employer pays you tokens
Check if the tokens you’re paid are classed as readily convertible assets (an asset that can be easily exchanged for cash).
If your income is a readily convertible asset
UK employers must pay your Income Tax and National Insurance contributions through PAYE before they pay you.
If they pay you in tokens, they’ll estimate the value of them, and pay Income Tax and National Insurance contributions based on the estimate. They’ll then deduct tax and contributions from other wages you receive in that period.
Your employer will pay Income Tax on your behalf if either:
If they pay tax on your behalf, you should reimburse them within 90 days of the end of the tax year.
If your income is not a readily convertible asset
Ask your employer if they’ve paid your Income Tax through PAYE. If they have not, you’ll need to pay it yourself.
To pay your own Income Tax, complete a Self Assessment tax return in pound sterling.
Records you must keep
You must keep separate records for the tokens you receive, including:
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 any questions, speak to the Robinsons Team
*Credits: www.rossmartin.co.uk & www.gov.uk
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