Tax on Cryptocurrency
The rapid growth in cryptocurrency and distributed ledger technology has seen an influx of new cryptocurrency businesses, traders, and investors which has attracted significant attention from HMRC and other tax authorities worldwide.
As a result, HMRC is actively enquiring into crypto businesses, traders, and investors to ensure that all individuals and businesses involved in cryptocurrency pay their fair share. Ensuring cryptocurrency businesses, traders and investors are structured properly is paramount to keeping tax-efficient and remaining compliant with HMRC.
How are Cryptoassets taxed?
Key financial organizations do not regard crypto assets to be cash or money. Cryptoassets are treated similarly to traditional assets such as stocks in terms of taxation and will be taxed appropriately.
Tax is levied on the underlying activity of buying or selling bitcoin. As a result, crypto traders and investors must evaluate a wide range of activities, from simple purchases to complex trades. and sell orders to hard forks, airdrops, staking, and the like.
The position is made more complicated as the industry develops with emerging unique and complex cryptocurrencies such as gaming and gambling platforms and the evolution of non-fungible tokens and hybrid tokens used for specific purposes.
If you are not a tax resident in the UK or do not have a domicile in the UK then you can benefit from favorable tax rules.
Income tax is generally applied to individuals who are buying and selling, or receiving cryptocurrency, as part of a trade.
The most visible is the ‘day-trader,’ who is aggressively buying and selling crypto assets with the goal of making a short-term profit. Even in these situations, it can be difficult to be classified as a ‘trader,’ and HMRC generally accepts that individuals will be liable to the lower capital gains tax rates (see below).
Individuals must acquire and sell crypto assets with sufficient regularity, level of organization, intention, and sophistication that the conduct amounts to a financial trade in and of itself to be classified as trading. If the trading threshold is met, the net profits will be subject to income tax rates of 20%, 40%, and 45 percent, as well as national insurance rates of 12% and 2%.
In most circumstances, a person who trades on their own account is unlikely to meet the description of a ‘trader’ for income tax purposes and will more than likely fall within the capital gains tax regime.
Capital Gains Tax
Individuals who buy, keep, and sell cryptocurrencies on their own account are generally considered to be engaging in investing activity and are subject to capital gains tax.
The sale of crypto assets will trigger a taxable event, with the proceeds being matched against purchases in the following order:
- Cryptoassets acquired on the same day;
- Cryptoassets acquired in the following 30-days
- The average cost of any unmatched crypto assets (known as the ‘pool’)
The amount of the capital gain is the difference between the value of the disposal proceeds and the value of the acquisition cost per the matching rules.
Capital gains tax is levied on total gains above an annual tax-free exemption, which is present £12,300 for individuals. Gains in excess of this allowance will be taxed at a rate of 10% up to the basic rate tax band (if available), and 20% at the higher and extra tax rates.
What about forks, stakes, and airdrops?
Airdrops – When someone takes part in a crypto airdrop, they are believed to have received the asset for free, which will be matched against disposal or added to the pool. The value of the airdrop will be liable to income tax if the person is ‘trading’ and subject to income tax.
Hard forks – If a fork results in the creation of a new cryptocurrency, the individual must assign a portion of the original coin’s cost to the newly acquired or generated cryptocurrency. This does not result in tax liability, but it does ‘split’ the cost of the previous asset, thereby increasing the liability in the future. If the person is trading, the value of the crypto asset received will be important.
Staking – Staking is akin to investment income and will be deemed to be subject to income tax regardless of whether a person is trading or not.
Cases that are unique and difficult to solve
Cryptoassets and the technology that underpins them are continually developing, and present tax rules aren’t equipped to deal with this.
Care must be taken to ensure that the right tax regulations are applied to arrangements that go beyond the basic limits of acquiring and selling crypto assets via a trade, airdrop, fork, or staking.
Because the tax treatment will frequently be confusing, it is critical to rely on a tax professional who is familiar with the sector, technology, and concerns. We are continually analyzing unique and difficult instances, with a current focus on the situation of Non-Fungible Tokens (“NFTs”) and NFT-based gaming platforms, in which transactions may be entirely exempt from taxation.
Residency and Domicile
For non-resident and non-domiciled individuals, the location or “situs” of cryptocurrencies is extremely crucial. Cryptoassets, according to HMRC, follow the individual’s residency. However, this is a simplified solution to a difficult topic, and HMRC’s approach is not supported by any authority.
On this premise, if a person is not a UK tax resident, he or she will not have any tax liability in the UK. There are severe anti-avoidance laws in place for anyone who has left the UK, which can result in a tax penalty if tax residency is reestablished in the UK within five years.
If a person is a tax resident in the United Kingdom but not domiciled there, they can choose the remittance basis. This allows a person to avoid UK taxation on international income and gains until they are repatriated to the UK, and then indefinitely if they are not.
Based on HMRC’s view of the location of crypto assets, a non-domiciled person would not be eligible for the remittance basis on cryptocurrency income and gains. However, the location of the assets could also be:
- The location of the exchange entity holding crypto assets
- The location of the services which host the technology
However, this would be contradictory to HMRC’s viewpoint, and any such position should be reported as such, with the risk of HMRC questioning and/or challenging any remittance basis claim.
Summing It Up
Crypto holders in the UK can seamlessly file their tax returns and pay for them through the HMRC website on GOV.UK. You can easily consolidate your gains through online tax tools like CBM Accounting. However, you can also seek guidance from accountants and crypto tax experts. Paying your bitcoin and other cryptocurrency taxes to HMRC has never been this easy, straightforward, and convenient.