How to declare my cryptocurrency to HMRC?
HMRC has published guidance for people who hold cryptocurrency. Explaining what taxes, they may need to pay? what records they need to keep? The world of cryptocurrency is expanding and becoming more mainstream. More and more people are investing. Therefore, the values are seeing rises significantly. There is currently widespread uncertainty about the tax treatment of cryptocurrency investments and trading activity.
Cryptocurrency received for earnings
Currency received in exchange for services is taxable as income. The method of taxation; however, and the availability of relief for any expenses differs depending on. Whether you’re engaged in self-employment or employment.
Self-employment
If you buy and ‘dispose’ of cryptocurrency as a personal investment. You will pay capital gains tax on the profits you make.
HMRC refers to cryptocurrency units as tokens. It says that disposal is a broad term that includes:
- selling tokens for money
- exchanging tokens for a different type of token
- using tokens to pay for goods or services
- giving away tokens to another person (unless it’s a gift to a spouse or civil partner)
The capital gains tax rates for disposing cryptocurrencies are:
- 20 per cent for higher and additional rate taxpayers
- 10 per cent for basic rate taxpayers (but this depends on your overall taxable income, the size of the gain, and your deducted allowances, as you’ll pay 20 per cent on any amount above the basic tax rate)
Profits made on cryptocurrencies by individuals is generally subject to capital gains tax. The tax rate of up to 20% after deducting the annual allowance (£12,300 for the 2020/21 tax year). Where you have bought and sold cryptocurrencies through a UK company. Any taxable profits will subject to corporation tax at a rate of 19%. If you regularly buy and sell cryptocurrencies. HMRC may say that you are liable to income tax at a rate of up to 45%. Most exchanges will keep a record of your transactions and let you download your history.
If you are already registered for self-assessment. Your proceeds will more than £49,200. But gains are below the annual exempt amount, then you will still need to report the gain.
Employment
Where cryptocurrency is provided by a third party in connection with employment. An income tax charge and Class 1 National Insurance contributions liability may arise. Employers must account to HMRC for the income tax and National Insurance contributions due through the operation of PAYE. Base on the best estimate that can reasonably be made of the cryptocurrency value.
If an employer has a UK tax presence. They must deduct and account to HMRC for the Income Tax and Class 1 National Insurance contributions due through the operation of PAYE. It base on the best estimate that can reasonably be made of the cryptocurrency value.
If an employer cannot deduct the full amount of Income Tax due from employment income, they must still account to HMRC for the balance. This is called the ‘due amount’. The employee must reimburse their employer for the ‘due amount’ within 90 days after the end of the tax year.
Cost analysis in cryptocurrency
There are some cryptocurrency-specific ‘allowable costs’ that you can deduct from your gain, including:
- transaction fees paid before the transaction is added to a blockchain
- advertising for a buyer or seller
- drawing up a contract for the transaction
- valuation that helps you work out your gain for that transaction
You can not deduct costs if you have already done so against profits for income tax, or for the cost of mining activities (like equipment or electricity).
It’s also important to get to grips with HMRC’s ‘pooling’ concept. While HMRC says that this ultimately makes for easier capital gains tax calculations, it can be a complex topic.
Deciding whether you’re trading can be complicated. I strongly recommend getting in contact before making any claim for trading losses in relation to cryptocurrency
Cryptocurrency purchased, sold or exchanged
The majority of individuals who buy, or otherwise receive, cryptocurrency will be considered to have acquired a capital asset.
Where the cryptocurrency is sold or exchanged for another asset (including another type of cryptocurrency), and a profit is made, capital gains tax will be due on any gains over and above the Annual Exemption amount for the relevant tax year. If the disposal realises a loss, relief can be claimed against capital gains of the same year, or subsequent years.
Calculation of the gain (or loss) is calculated by reference to the ‘pooled’ cost of the currency. This is essentially the cost of all of that specific currency, divided by the amount of that currency. For example, if you purchased two Bitcoin for £100 each, and then later purchased another four Bitcoin for £200 each, the total cost of your Bitcoin would be £1,000.
This total cost is then split amongst the six Bitcoin, and so if you sold one Bitcoin, the cost of that Bitcoin for capital gains tax purposes would be £166.66.
There are special ‘bed and breakfasting’ rules that apply. Where cryptocurrency purchase within 30 days of selling cryptocurrency of the same type. Essentially, those tokens acquire within 30 days. It treat as having already been disposed of (earliest disposal first).
Tax advice and tax investigations
In light of the fact that there will individuals and businesses, who have made significant gains during the last six months. HMRC will undoubtedly continue to make use of the wide range of information powers to gather information from this jurisdiction and beyond. Therefore, if you hold cryptocurrency through an exchange. It is very likely that HMRC will receive information regarding those holdings.
