Death and taxes are said to be the only certainties in life, and although we cannot assist you with your mortality, we can help you with the other. When dealing with cryptocurrencies, it is essential to stay ahead of your tax obligations as soon as possible because penalties for not doing so may quickly pile up.
Tax regulations for bitcoin transactions can be a little confusing, and you may be liable for a variety of things, including income and company tax, stamp fees, and – depending on the transaction type – VAT. The way you pay tax and how much you pay depends on whether you are classified as a business or an individual.
The good thing is that HMRC gives a lot of material that makes understanding crypto regulations a bit easier, which we will go over here.
How does it work? Are you a company or an individual?
To begin, keep in mind that if your activity level is equivalent to that of a corporation, HMRC may choose to consider you as a business rather than an individual. So, how does HMRC figure out if your cryptocurrency is an investment or if you are a crypto trader? That relies on several things, including:
- The total number of transactions and the frequency with which they occur.
- The length of time you devote to the activity
- The amount of time you keep instruments, whether you buy and sell them quickly or keep them for a long period.
Cryptocurrency extracting as a business:
If extraction is defined as a company based on those standards, all earnings will be added to trading profits and taxed. Fees or incentives for any type of staking action will be included, however, reasonable expenditures will be deducted.
Consider that any rise in value from the time of acquisition will be added to trading earnings when selling mined bitcoin. For such a purchase, you will additionally have to pay National Insurance Contributions.
Staking or lending as a business is subject to a tax:
It is worth noting that this is a murky area because HMRC provides no reporting advice. The best method is to announce it in the same manner as extraction is declared. That is, any staking or lending revenue would be taxed at your usual income tax rate. If you were paid in cryptocurrencies, you would have to figure out what the fair market worth of the coins was at the time you got them.
As an individual, investing in cryptocurrency:
What precisely is a disposal for capital gains purposes?
If you are classified as an individual and invest in crypto, you will have to pay capital gains tax when you sell it. HMRC defines ‘disposal’ as follows:
- Buying and selling crypto assets for profit
- Exchanging one form of crypto asset for another type of crypto asset
- Purchasing products or services using crypto assets
- transferring crypto assets to a third party
The number of capital boosts will be the difference between the selling profits and the crypto asset’s capital costs – in other words, the sale price less than the purchasing price.
How much cryptocurrency tax do you have to pay?
Your tax bracket will determine the answer to that question:
- Your capital gains tax rate will be 20% if you are a higher or extra rate taxpayer.
- If you are a basic rate taxpayer, on the other hand, your tax rate is determined by your taxable income and the magnitude of the gain (after any allowances are deducted).
Certain unique laws apply to high-frequency traders or firms, which we will discuss later.
Example of calculating capital gains on a cost-basis:
A capital gain is defined as the difference between the selling price and the cost of an asset when it is sold. The former is generally self-evident, whereas the latter takes some accounting knowledge.
HMRC calculates using the share pooling technique. With the pooling approach, you essentially average the acquisition costs of all the crypto you have bought to compute the buy cost of the coins you are selling.
Natalie paid £1,000 for one BTC. She paid £2,000 for 0.5 BTC six months later. Her entire bitcoin pool is 1.5, and her total permitted expenses are £3,000.
Let us assume Natalie sells 0.5 BTC for £3000 after a few years. The following is how she would calculate her capital gains:
|Less allowable costs||£3,000 x (0.5 / 1.5)||£1000|
Natalie will have one BTC pool left after this sale, with a £2000 allowed cost.
Be aware of the regulations regarding same-day and bed-and-breakfast reservations:
The same-day and 30-day restrictions that apply to stocks apply to cryptocurrencies as well. That has to avoid “wash sales,” which are when you sell cryptocurrency and then buy it again to try to recoup losses and lower your tax bill.
So, let us start with the same-day rule. Let us pretend you sell one cryptocurrency and acquire another on the same day. In such instances, the cost basis for your sale will be the price at which you acquired the cryptocurrency on that particular day. Even if the acquisition occurs before the sale, as long as both transactions occur on the same day, this will still be the case.
The 30-day rule is similar, but the timing changes (as the name implies), and any crypto you buy within 30 days of a sale is utilized to determine its cost basis. There is a reason why the regulations are in place. They exist to guarantee that you do not sell your shares at the end of the tax year to generate losses that you can then write off before promptly repurchasing them.
Transforming one cryptocurrency into another:
HMRC indicates that trading one cryptocurrency for another is a taxable event as well. That is, you are essentially selling one asset that is subject to capital gains tax and buying another. The sales price for that transaction is determined by the market value of the cryptocurrency you receive.
Using Cryptocurrency to pay for products and services:
Using cryptocurrency to pay for products or services is treated the same as selling cryptocurrency by HMRC, and so is liable to capital gains tax. However, keep in mind that the market value of the cryptocurrency you use to make a purchase will be included in the sales profits.
Transferring cryptocurrency between your wallets or accounts:
While there is no tax responsibility when you move cryptocurrency between your wallets, it is crucial to remember that you must still keep account of such transactions. If you do not, HMRC may mistakenly believe they are disposals and tax them.
Taxation on Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs):
The process of acquiring tokens or coins in a yet-to-be-released cryptocurrency or firm is referred to as Initial Coin Offerings (ICOs) or Initial Exchange Offerings (IEOs). Investors pay for the new token with current cryptocurrencies like Bitcoin or Ethereum in this example.
To put it another way, it functions similarly to a crypto-to-crypto trade. The crypto you trade for the ICO token will be subject to capital gains tax. The “sale proceeds” will be the market value of the current crypto on the date of the exchange, not the new coin. Furthermore, this market value will be the cost foundation for the new token you get from the ICO, which you may use to compute pooled expenses.
How to Reduce Your Tax Expense?
However, the news is not all negative. You can still avoid incurring excessive tax liabilities if you pay great attention to the regulations surrounding cryptocurrencies and tax, as you should with most HMRC-related matters. Our small company accountants provide an overview of what you may and cannot claim.
Utilize your yearly capital gains tax allowance:
Remember to budget for your allowance. Capital gains tax is only due if your profits exceed £12,000 (raised to £12,300 for the tax year 2020-2021). That is, you compute your capital gains and pay no capital gains tax if the result falls below the threshold.
Compose for your cryptocurrency losses:
A capital loss occurs when someone sells bitcoin for less than the cost basis. That loss can be deducted from any total gains, but you must first disclose it to HMRC. Losses can be reported either in writing or on your tax return. Capital losses can be claimed at any time after the end of the tax year in which they occurred, for four years.
Remember that if you sell crypto to a connected individual, the real selling price isn’t the same as the sale profits; instead, the market value of the crypto on the day of the transaction is evaluated.
Claiming losses for coins or cap coins that are no longer in circulation:
It is not uncommon for someone to hold cash that has become worthless or of “negligible value” when crypto-assets are prone to extreme fluctuations. In this situation, the asset’s owner might claim insignificant value. The crypto assets are processed the same way they would be if they were disposed of, and then re-acquired for the sum specified in the claim. This enables you to write off a significant loss on an asset that has become illiquid.
Remember that an insignificant value claim just requires the name of the now-worthless item, the amount at which the asset should be considered as disposed of (typically £0), and the supposed disposal date. Once submitted to HMRC, such a claim results in a loss that you can balance against gains. You can submit a claim to HMRC for both the loss and the insignificant value at the same time.
Taking advantage of deductible costs:
It is worth noting that you can subtract some permitted expenditures from the sales proceeds when computing a gain or loss, as follows:
- The original purchase price (in pounds sterling) for the crypto asset.
- Before a transaction was put to a Blockchain, the transaction fees were paid.
- Any trade-related exchange costs.
- Professional fees for drafting the contract for the asset’s purchase and sale.
- Expenses associated with advertising for a buyer or a seller.
- The costs of apportioning or valuing assets to determine gains or losses.
It is important to remember that the following expenses are not deductible for capital gains tax purposes:
- Any expenses that have previously been deducted from earnings for tax purposes.
- Mining-related expenses, such as power and equipment. This is because, in the instance of persons mining cryptocurrency as a hobby, the expenses of power and equipment are not entirely attributed to mining cryptocurrency. When mining equipment is disposed of away, however, some expenditures are deductible.
Finally, it is worth mentioning that in the event of mining as a company, the crypto assets will be included in the trading stock. If the assets are transferred out of trading stock, the company will be considered as if the crypto was purchased at the value of the trading account. When it comes time to dispose of the item, that value might be considered as an allowed expense.
For additional tax information, visit our website, or get an accounting quotation right now!
We hope you found this information helpful! Our expert accountants can assist you to get it right when it comes to tax, whether you are trading cryptocurrencies as a corporation or as a person. We are a group of trained and experienced accountants that provide comprehensive accounting support to businesses of all sizes and types. We are not your typical accounting business; we are accountants that specialized in technology. Get in touch with CBM accounting to get further tax information and services. We provide high-quality guidance for your business as per your requirements.