De-mystifying the taxation of cryptoassets

Most people have heard of cryptoassets (crypto), and many will have seen stories of fortunes being made and lost in digital investments such as cryptocurrency and non-fungible tokens (NFTs). This has encouraged more and more ordinary investors to take the plunge and buy a range of digital assets, often with no thought to the tax implications when they cash out. 

Is crypto taxable?

Despite what the highs and lows of crypto investment might suggest, HMRC does not consider that buying or selling crypto is gambling, and gains and losses from trading in crypto are taxable as capital gains or losses for tax purposes. Exceptionally HMRC will consider disposing of crypto as a trading activity, but UK residents selling crypto will never be tax-exempt, even if using foreign trading exchanges or digital wallets.

Capital gains tax

Taxable disposals of crypto are not limited to straightforward sales. Disposals also include:

• using crypto to purchase goods or services;
• exchanging one type of crypto for another; and
• making gifts of crypto.

Any actual or deemed disposal of crypto at a gain is generally subject to capital gains tax (CGT) at current rates of up to 20%. 

Income tax

In some limited circumstances, such as when crypto mining, the resulting profits may be subject to income tax at rates of up to 45% instead of CGT. Employees paid in crypto are still subject to income tax and National Insurance contributions (NICs), and the employer will usually also have to pay NICs and meet reporting obligations, on the basis the taxable income arises from the individual’s employment. However, subsequent gains and losses arising on the crypto received as remuneration for that employment are generally subject to CGT.

Reporting

Crypto disposals may not always result in a tax charge; for example, if any gains fall within an individual’s tax-free CGT allowance, or if losses are made, but the transaction may still need to be reported.

Generally, the larger a person’s crypto portfolio and number of crypto transactions, the more complex the tax position will be, and hence that professional advice should be obtained.

Boom and bust

Celebrity endorsements are common for crypto, and these can give rise to a short-term, rapid increase (or ‘pump’) in value after launch. Scammers seek to exploit this phenomenon, creating crypto that spikes in value, soon followed by a crash.

Investors can at least offset crypto losses against capital gains on other disposals in the same or future tax years, but these will need to be officially claimed, typically via a self-assessment tax return, within four years of the end of the tax year in which the relevant loss arose.

HMRC enquiries

HMRC has increased the use of its powers to access information from crypto exchanges, obtaining large amounts of data about investor transactions and holdings.

Earlier this year, it was reported that over 8,000 ‘nudge’ letters had been sent by HMRC to crypto traders, as it suspects that thousands of investors have underpaid tax.

As HMRC reviews the information received in response to these letters, further HMRC campaigns and enquiries are likely, resulting in potentially significant revenues for the Exchequer, and tax charges and professional fees for investors.

From 2027, crypto exchanges will also be obliged to share customer information with tax authorities in the UK and at least 47 other tax jurisdictions, making it even easier for HMRC to identify non-compliance.   

Getting organised

No matter the size of your crypto portfolio, you need to make sure you meet your tax obligations. Failure to do so can be expensive, with tax-geared penalties and interest to pay on top of the tax itself.

Taking professional advice can ensure you are fully aware of your tax and reporting obligations and how to manage them, providing peace of mind in an area where HMRC guidance is continuing to evolve and, in many cases, remains unclear.

For more information, please get in touch with Andrew Robins or your usual RSM contact.