The trading of cryptoassets has soared in the past couple of years, and the trend is set to continue. Despite their popularity, many are still unaware that tax rules exist for them, meaning they could face penalties further down the line. With this in mind, here’s what you need to know about paying UK tax on cryptoassets.
What are cryptoassets?
Cryptoassets were originally designed as a type of electronic cash that could be managed independently of a central bank or government. The main type of cryptoasset, known as ‘exchange tokens’, are specifically intended to be used as a form of payment, and includes ‘cryptocurrencies’ such as Bitcoin. If an individual holding exchange tokens is a UK resident and carries out a transaction with their tokens which is subject to UK tax, then they are liable to pay tax on it.
An individual who receives cryptoassets from their employer as a form of non-cash payment will be liable to pay Income Tax and National Insurance contributions on this.
If an individual is deemed to be conducting financial trade using cryptoassets, then Income Tax will apply to their trading profits. HMRC will decide whether the activity amounts to financial trade or not based on a range of factors, including the frequency of trade and level of organisation involved. However, individuals buying and selling cryptoassets in a manner that meets the criteria are likely to be a rare exception.
Capital Gains Tax
Whilst HMRC will not usually consider an individual buying and selling cryptoassets as ‘financial trade’, it will normally amount to ‘investment activity’. This means that any gains made through disposing of cryptoassets are a ‘chargeable asset’, so individuals will be expected to pay Capital Gains Tax on them. A ‘disposal’ includes:
- Selling cryptoassets for money
- Exchanging cryptoassets for a different type of cryptoasset
- Using cryptoassets to pay for goods or services
- Giving cryptoassets away to another person who isn’t a spouse or civil partner
Note: An individual will not have to pay Capital Gains Tax on cryptoassets they donate to charity.
Completing a Self-Assessment Tax Return
Transaction records on cryptoasset exchanges may be erased after a set amount of time. Therefore, each individual trading in cryptoassets must keep personal records for each transaction, which will ensure they have accurate records when it comes to completing their Self-Assessment Tax Return.
As many cryptoassets are traded on exchanges that don’t use pound sterling, the individual must convert the value of the gain or loss into pound sterling on the Self-Assessment Tax Return. If a transaction involves two cryptocurrencies being exchanged for one another, then an appropriate exchange rate must be established in order to convert into pound sterling. HMRC states that the valuation should be arrived at using a reasonable and consistent methodology, so make sure you keep a record of this and are prepared to explain your reasoning if necessary.
How we can help
As the digital world of cryptoassets expands, it’s crucial you have the information and advice you need to stay HMRC-compliant. With our team of dedicated tax experts in Salford, MCC Accountants can help. If you’d like to know more about paying tax on cryptoassets, or require any other tax advice at all, call us on 0161 707 1500 or use the details on our contact page.