Tax Treatment of Cryptoassets

What are Cryptoassets?

Cryptoassets (also known as token or cryptocurrency) are secured digital representations of value.

Cryptocurrencies are a class of digital currency that do not possess a legal status of currency or money. However, they can be used as a means of exchange. Digital currencies are not backed by a central bank that can print money to meet growing demand; there are simply a fixed number of cryptocurrencies, for example bitcoin. Cryptoassets are increasing in popularity and it is therefore important to understand the tax consequences of transactions involving cryptoassets.

Do I have to pay tax when I sell?

It is important to understand that a ‘disposal’ for tax purposes can be defined as:

  • Selling
  • Exchanging
  • Using cryptoassets to pay for goods or services
  • Give away

HMRC always look at the fact of each case and understandably are continuing to update the guidance due to the evolving nature of the underlying technology and the areas in which cryptoassets are used. Currently HMRC does not consider cryptoassets to be currency or money nor do they consider dealing in cryptoassets to be gambling. Therefore in the vast majority of cases, individuals hold cryptoassets as a personal investment. They will be liable to Capital Gains Tax (CGT) when they dispose of the cryptoasset, the gain being the difference between the sale price and original purchase price.

CGT rates depend on the individuals income in the year and will be either 10%, 20% or a mixture of both. Every individual has an annual exempt amount they can make each year before they suffer CGT, the amount in 2021/22 is £12,300.

There may be cases, although exceptional, when HMRC deem an individual to have a ‘trade’ and they will consider many factors, such as the frequency of transactions, to arrive at this conclusion. If HMRC did deem the transactions to be that of a trade then Income Tax rules would take priority. Income tax rates are 20%, 40% and 45%.

How do I report and pay the tax?

Capital gains usually need to be reported on a self-assessment tax return each year, trading income will also need to be reported. The filing and payment deadline is 31 January following the end of the tax year the transaction falls within.

It is best to seek professional advice to ensure your gains are calculated correctly and you understand how to report this on a tax return.

What records do I need to keep?

HMRC expect all taxpayers to retain appropriate records should they ever enquire in to a tax return. Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return. Therefore it is important to ensure clear records are kept and HMRC recently published internal guidance showing what they would expect to be kept by inidividuals:

  • The type of cryptoasset
  • Date of the transaction
  • If they were bought or sold
  • Number of units involved
  • Value of the transaction in pound sterling (as at the date of the transaction)
  • Cumulative total of the investment units held
  • Bank statements and wallet addresses, in case these are needed for an enquiry or review.

I have made a large gain on my assets – what should I do?

Aside from ensuring you report the gain to HMRC and pay the tax via self-assessment, making a large gain on your assets may mean you have spare funds to invest in other ways.

Our Wealth Management team specialise in pensions, investments and retirement planning and would be happy to discuss how they can assist you if you were looking to make tax efficient investments or put a plan in place for an income through to retirement. We would always recommend you utilise pension saving allowances, ISA allowances and to look at your current income/asset structure.

Contact us

If you have any queries regarding the tax consequence of Cryptoasset transactions, please do not hesitate to contact us at advice@taitwalker.co.uk.