If you are resident in the UK, there is a strong chance that you will be taxed on your cryptocurrency. The exact details of your tax liability will depend on a number of factors. This article will explain the basic framework of tax on cryptocurrency in the UK. If you have significant cryptocurrency assets, you may find it helpful to get professional advice.
How HMRC views cryptocurrency
HMRC views cryptocurrency as tokens. In short, this means that they are considered to be representations of value rather than having a value themselves. This means that tax on cryptocurrency is levied on its assumed fair value in Sterling. Likewise, it can only be paid in Sterling.
There are four main types of tax that can be charged on cryptocurrency. These are Inheritance Tax, Capital Gains Tax, Corporation Tax, and Income Tax.
Inheritance Tax
If somebody holds cryptocurrency when they die, the value of that cryptocurrency will be assessed and included in the valuation of the deceased’s estate. It will then be subjected to Inheritance Tax at the standard rate.
Capital Gains Tax
Cryptocurrency investments are essentially treated in the same way as shares. They are not taxed while you hold them. As soon as you sell them, however, the gain or loss is included in your capital gains allowance for that year.
Unlike shares, however, it is currently not possible to hold cryptocurrency directly in an ISA. This may change in future so it’s certainly worth keeping an eye on developments in this area.
Investors should also note that if they undertake a high volume of investing activities, HMRC may class them as traders. If they do, then HMRC may decide to charge you Income Tax on trading instead of Capital Gains Tax.
Corporation Tax and Income Tax(/NI)
If you are receiving cryptocurrency as payment for goods or services, then it will be treated as straightforward business income.
This means that if you are operating as a limited company, the assessed fair value of your cryptocurrency will count toward your company’s profits. It will therefore be included in your corporation tax assessment. If you’re operating as a sole trader, then you’ll pay Income Tax (and NI) on it in the usual way.
Mining cryptocurrency
If you’re mining cryptocurrency, then how you are taxed will depend on whether or not HMRC perceives you as acting commercially. If you are not acting commercially, then you simply declare the fair assessed value of the cryptocurrency as miscellaneous income on your tax return. If HMRC has not realised that you need to fill in a tax return, you need to contact them to declare it.
If you are acting commercially, then you are in a very similar situation to people who receive payment in cryptocurrency. Any profits you make as a result of your mining activities will be counted as business income. This includes any profits you make on the sale of cryptocurrency. You will pay Corporation Tax on Income Tax (and NI) on them, not Capital Gains Tax.
Alistair Allcock
Alistair AllcockAli has a wide range of experience within the accounts and audit areas, drawing on his experiences from working for both large and mid-tiered practices. Find out more about Ali here.