The rapid increase in the value of digital assets, and Bitcoin in particular, has encouraged greater investment in this area. Are you aware, however, that selling or moving between cryptocurrencies may be subject to UK capital gains tax (CGT)?
How are cryptocurrency disposals taxed in the UK?
For almost all individuals, gains or losses on Bitcoin or other cryptocurrencies are dealt with under the capital gains tax regime and treated as arising where you are tax resident. The gain or loss is calculated as the proceeds in £ sterling minus the cost in £ sterling.
Where only part of a specific holding of a cryptocurrency is sold, the share matching rules (set out in the Taxation of Chargeable Gains Act (TCGA) 1992) are used to determine the base cost of that part. This basically means taking the average cost of this currency, subject to matching against acquisitions on the same day or thirty days after the sale.
Identifying a taxable disposal may not be as straightforward as you think, particularly if you use one cryptocurrency to buy another. If this is the case it is treated as a disposal of the original currency and an acquisition of the new one with deemed proceeds/cost of the £ sterling value of the currencies at that time. Similarly, if cryptocurrencies are used to pay for assets or services, this is a taxable disposal of the currency, as is a gift of currency. This can make calculations, and record keeping, challenging.
Reporting cryptocurrency capital gains or losses
For the 2020/21 tax year, if the total proceeds from all chargeable asset disposals are less than £49,200, and gains are less than £12,300 there is no need to report this unless a capital loss needs to be claimed. Where a report is required, gains should be included on the capital gain tax pages of the self-assessment tax return. If an investor is not registered for
self-assessment, they need to contact HMRC to notify they may have a liability. Any tax due will be payable on 31 January 2022.
Can gains be taxed as income?
In exceptional circumstances receipts from crypto-mining, transaction confirmations, staking and airdrops (unless received with no strings attached) are taxable as trading or miscellaneous income. If you engage in a large number of transactions, and spend considerable time doing so, in a sophisticated and organised manner, this may be treated as trading, and is therefore subject to income tax.
Some transactions in digital assets are carried out through futures contracts, rather than by direct purchase and sale of the cryptocurrency.
In these circumstances, the gains can be subject to either income tax as trading profits, capital gains tax or miscellaneous income, depending on the
Unreported income and gains
If income or gains have been omitted from an earlier year’s return, you have until 31 January 2022 to advise HMRC about 2019/20 omissions.
If there are omissions for earlier years, it is important to seek help quickly as there are potentially large penalties.
Non tax considerations
- Security – make sure your currency is in a secure place to avoid hacking or fraud.
- Private keys – keep these safe to ensure you don't lose access to the currency.
- Passwords – keep them secure.
- Information – ensure your family are aware of the currency and can access it if you were to die or lose capacity.
- Consider whether your will needs to address your digital assets
- Transaction records – make sure you back these up regularly in case an exchange closes, doesn’t store all transaction data continuously and you lose access.
- International – if you have a tax position in more than one country be aware that other countries may tax cryptocurrencies differently to the UK.
The UK taxation of cryptocurrencies is relatively straightforward. The major challenges are recognising the need to make returns, and record keeping particularly for pure cryptocurrency transactions. If you have made material gains, failure to declare could be very expensive. Get in touch with Sharon Omer-Kaye or Chris Etherington for more detail.