Despite there being over 2000 different forms of cryptoassets on the market, cryptocurrency is still considered to be a relatively new type of asset that has entered into the mainstream over recent years. It is undoubtedly growing in popularity with a rising number of people buying, trading and ‘mining’ for cryptocurrency. As a result, there have been more and more questions regarding how people will be taxed – if at all – on these transactions.
Interestingly, the key UK financial organisations such as HMRC, Bank of England and the Financial Conduct Authority do not view cryptocurrency as real currency or money. Instead, they are seen as assets similar to shares and as such they are treated in the same way for tax purposes. Depending on the situation, there will be various ways you may incur different types of tax liability when disposing of or receiving cryptocurrency.
Capital Gains Tax (CGT)
HMRC have indicated that CGT is likely to be the most common tax liability to be incurred from the disposal of cryptocurrency because the asset is usually held for investment purposes. CGT of 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers will be applicable on any gains made from the disposal of cryptocurrency in the following scenarios:
- You sell cryptocurrency for money
- You exchange cryptocurrency for a different type of cryptoasset
- You use cryptocurrency to pay for goods or services
- You gift cryptocurrency to another person
CGT may be difficult to calculate in some instances because not all cryptoassets will have a direct pound sterling value and may have to be converted into another type of cryptoasset before a pound sterling value can then be determined. This makes it particularly important for you to keep accurate records of the value of your assets at each taxable event in order to justify your tax position.
As with other assets that attract CGT there are also allowable costs to mitigate the tax:
- Transaction fees paid before the transaction is added to a blockchain
- Advertising for a purchaser or vendor
- Any professional costs to draw up a contract for the acquisition or disposal of the cryptoasset
- Costs of making a valuation or apportionment to be able to calculate gains or losses
Should a loss be made as a result of the disposal of your cryptocurrency you can offset this amount against any gain made in the current tax year or carry it forwards to offset against future gains.
Income Tax and National Insurance (NI)
Should you receive cryptocurrency as a result of earnings for employment you will be required to pay income tax and NI. Income tax rates for 2019/20 are currently 20% for basic rate taxpayers earning below £50,000, 40% for higher rate taxpayers on income between £50,001 – £150,000 and 45% for additional rate taxpayers on income above £150,000*. NI is 12% for those in the basic rate tax band and 2% for those in the higher and additional rate tax bands. Where income tax is applicable it will take priority over CGT.
Other events where income tax and NI may apply are as follows:
Due to the complexity and volatility of cryptoassets, trading is less common and HMRC have not set definitive rules as to what level of activity will constitute as trading. However, they have stated that they will assess each case pragmatically and apply the badges of trade:
- Frequency and number transactions
- Connection with another existing or similar trading transaction or interest
- Whether and how the transactions are financed
- Length of the ownership of the cryptoassets
- The organisation and sophistication of the operation
- Reason for the purchase and/or sale
Cryptomining is the process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. To do so miners are required to solve highly complicated mathematical problems and in exchange for cracking the code they receive cryptocurrency and are able to authorise the transaction. Specialised equipment is required to be able to mine cryptocurrency which takes up vast resources such as electricity and a strong stable internet connection.
Earnings from mining will be considered as income and therefore liable to income tax and NI in two instances:
- The mining falls with the same scope of trading outlined above
- If it does not fall under the activity of trading it will be treated as miscellaneous income and this means that, should any loss occur, it can only be offset against other miscellaneous income
Airdropping is when cryptocurrency is allocated to someone’s wallet and these are often received this way as part of marketing campaigns. Airdrops will only attract income tax and NI if received in exchange for goods or services provided, or as a result of activity that falls into the scope of trading. When cryptocurrency is received through airdrop in a personal capacity i.e. they have not done anything in return for the assets, then no tax will be charged, although CGT may apply when they come to dispose of it.
Although cryptocurrency is not considered to be money, it nonetheless remains a potentially valuable asset. It can be passed onto others by means of inheritance and will be taxed in the same way (find out more about inheritance tax rules here). The one complication is determining its value which will need to be converted into pound sterling when calculating the amount of inheritance tax due if applicable.
For any help with calculating and declaring the tax owed from cryptocurrency get in touch for a free initial consultation or take a look at our self-assessment tax return page for more information on this service.
* Please note that £1 of personal allowance is deducted for every £2 earned over £100,000. This effectively means the entire personal allowance will be removed once you earn over £123,000 and the consequence is that the marginal rate of tax for someone between £100,000 and £125,000 will be 60%.