Cryptocurrency & Tax: What You Need to Know

Cryptocurrency has gone from being something very niche that only a handful of people were aware of, to a form of currency that is sweeping the globe and is now in the hands of a great many individuals. As this type of currency is unlike anything we have seen before, many people do not fully understand the implications of owning it, particularly when it comes to the subject of tax.

There are a lot of questions surrounding whether you can be taxed on the cryptocurrency that you own and how this works. Obviously, the rules will vary from country to country, but here, Rogers Spencer, Accountants in Nottingham share this insight on how UK tax laws can apply to cryptocurrency.

What is cryptocurrency?

Cryptocurrency is a new form of currency that exists only in the digital world. Encryption technologies have been applied to it so that it can be used as both a currency and a virtual accounting system, and it is now acceptable to use this as an alternative form of payment in some cases.

New digital coins are created through a process of mining, which is achieved through validating cryptocurrency transaction on a blockchain network. These are then added to a distributed ledger. Anyone can buy into cryptocurrency, and just like any other form of investment, its value can go up and down. That is why, for tax purposes, HMRC will base any calculations on what it perceives to be the fair value of the particular cryptocurrency that you hold.

HMRC and Cryptocurrency

When something as new and revolutionary as cryptocurrency emerges, it can sometimes take traditional institutions a while to catch up with developments, which often leaves people unsure of where they stand, as rules can change. Currently, HMRC views cryptocurrency as tokens, which means that they are representations of value, and not something which actually has value itself.

Therefore, the tax that HMRC have decided needs to be paid where cryptocurrency is concerned is based on its assumed fair value in Sterling, and any tax that needs to be paid should be made in Sterling as well.

As far as HMRC are concerned, cryptocurrency is liable for inheritance tax, capital gains tax, corporation tax and income tax where applicable. However, the taxes that are applicable to you will depend on whether you are viewed to be a business or an individual. HMRC will look at the number and frequency of your transactions, your organisation, your levels of risk, the commerciality of your activity, the amount of time that you devote to it and whether you are buying and selling within a matter of hours or minutes or whether you are holding onto instruments for longer. This will help them to determine how you should be classified, and therefore what tax you might be liable for.

Inheritance Tax

Inheritance tax is applied when any assets of value are passed from one person to another when they die. Cryptocurrency is considered to be one of those assets and will be treated in the same way as anything else left to you from the estate. If the value of that estate is valued at being below £325,000 or the entire value of the estate is left to a spouse, then there is no tax to pay.

However, you can be charged a standard rate of 40% on the amount of the estate that sits above the £325,000 threshold. That means you can pay inheritance tax on cryptocurrency if it totals more than this or is part of an estate that has a total value which exceeds the threshold.

Capital Gains Tax

Cryptocurrency is generally seen as an investment as is treated in much the same way as shares. That means that you are not taxed for owning them, but any profit or loss that you make when you sell them will become part of your capital gains allowance for the year. You should keep in mind that how much you hold and where you hold it is also important. HMRC may class you as a trader if you are subject to a high volume of investing activities and could charge you income tax instead of capital gains as a result. It is also worth remembering that you cannot hold cryptocurrency in an ISA.

Corporation Tax and Income Tax

Whilst many people first started holding cryptocurrency, they did so by investing in it, a growing number of individuals are now prepared to accept it as a form of payment for goods and services. Therefore, if you receive cryptocurrency as payment, it will be treated in the same way as any other business income. That means the fair value of your cryptocurrency will count as part of your company’s profits and will be subject to corporation tax. If you are a sole trader, then income tax will apply instead.

Tax on mining cryptocurrency

If you have decided to mine cryptocurrency, then the outcomes will depend on whether HMRC views this as commercial activity. For those who are not classed as acting commercially then you will simply be required to declare the fair value of your crypto on your tax return as miscellaneous income.

For those who are deemed to be acting commercially then you will be taxed on the profits that you make from your mining activities. This will be classed as business income and will therefore be subject to corporation tax or income tax. Any fees or rewards that you receive for staking activities will also be added, however, any reasonable expenses can be deducted. When disposing of mined cryptocurrency, any gain that you make in the value of that asset will be added to your trading profits and National Insurance will need to be paid for that transaction.

As with any form of financial investment, it is always wise to seek professional advice, particularly if you hold amounts of any great significance. This will help you to better understand the options that are open to you, and how you can avoid any pitfalls that you might have been unaware of.