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Cryptocurrency Tax Guide

What is cryptocurrency?

Cryptocurrency is a digital currency that can be used to buy goods and services online. Unlike paper currencies that are owned by or are specific to different countries, cryptocurrencies are issued privately by individuals or companies. Cryptocurrencies use strong cryptography to ensure secure online transactions. Until today many cryptocurrencies have been launched like bitcoin, Ethereum, and Binance coin, etc.

Why are cryptocurrencies such hype?

Among many tech enthusiasts, cryptocurrencies are called the currency of the future. Cryptocurrency sure has its futuristic aspects; it uses a blockchain system that makes it more secure while removing central banks’ monopoly over the money supply. However, it is not only the fascinating technology that contributed to the hype but also the rapid increase in the value of cryptocurrencies.

Reliability of cryptocurrencies

Cryptocurrencies might be very secure and might be rapidly increasing in value but lack stability and don’t generate any cash flow. Traders prefer a stable currency so that they can determine the prices of goods and services. The Currencies that are frequently changing in value bring uncertainty in profit or loss for the traders. Cryptocurrencies usually face high fluctuation in their value, making them unreliable currency for investors and traders, therefore some notable investors have advised people against using cryptocurrencies.

Are cryptocurrencies legal in the UK?

Cryptocurrencies are legal in the UK and are also subject to taxation rules under HMRC. HMRC introduced taxation criteria on cryptocurrency in 2014. Here we will discuss complete guidelines on taxation rules and regulation on cryptocurrencies provided by HMRC.

HMRC tax guideline on cryptocurrency

HMRC taxation rules and regulations vary according to the type of crypto asset, whereas HMRC does not consider crypto-assets as money or currency. HMRC classify crypto-assets according to the way they work. According to HMRC, crypto-assets are classified as exchange tokens, utility tokens, security tokens, and stable coins.

Exchange tokens – used as a means of payment such as bitcoins. Utility tokens – provide access to particular services or goods on a platform. Security tokens – entitles to share in profits, ownership, and business interest. Stable coins – offer price stability and are backed by reserved assets such as fiat currencies. These definitions categorize crypto assets you hold. However, they are taxed according to their use.

Taxation Rules

HMRC can tax your crypto assets depending upon if you are a business or an individual. If your activities are equal to that of a company, you are treated as a business. HMRC decides whether you are a business or an individual based on your transactions, commerciality, and the length of time you hold on to an asset.

If HMRC declares you as an individual, you are subject to Capital Gain Tax rules. That means you will be liable to pay tax when you sell, trade, or use cryptocurrency for purchase, etc. The capital gains are evaluated by calculating the difference between the value of assets in GBP at the time of disposition and its value in GBP when you paid for it.

Example

A person bought 1 bitcoin at the rate of 3224.52 GBP on October 1, 2017, while he sold his bitcoin for 30,077.92 GBP on January 8, 2021. The capital gain on the given transaction is equal to:

GBP at the time of disposition – its value in GBP when you paid for it = Capital Gain

30,077.92 GBP – 3224.52 GBP = 26,853.4 GBP

If HMRC considers your activities or crypto-asset transactions as business activity, your income will be liable to income tax. To determine whether HMRC categorizes you as an individual or a business, you can also look into financial trader rules.

Share Matching

HMRC calculates the cost basis of a coin deposition by pooling. It allows simpler calculation of capital gain tax on crypto assets. Each type of token is evaluated in a separate pool like ether, Litecoin, and bitcoin will be evaluated in their respective pools, having their own “pooled allowable cost”. To calculate the allowable cost, the following three rules are applicable depending on the order of their disposal:

Same Day Rule – the token is acquired and disposed of on the same day. Bed and breakfasting rule – tokens acquired in 30 days after its disposal. Crypto-pool Rule (section 104 Rule) – all previous coins purchased; price averaged. These rules prevent taxpayers from selling and repurchasing crypto assets (at a lowered rate to realize losses) to reduce taxes.

Allowances

A certain amount of capital gain is not taxed and is known as allowance. Individuals having cumulative capital gains of up to £12,300 for the tax years 2020 to 2021 are not taxable. Whereas gifts to spouses or charities are also not taxable.

For more information, you can also visit GOV.UK.

Losses

You can also claim capital losses for any losses incurred in the transaction of your crypto assets. You can file your capital losses within four years of when the capital loss is incurred. Filing capital gain losses can decrease your taxes. You can also claim losses as negligible value claim if the crypto assets you hold lose their value, you lost the wallet key, and the tokens are not recoverable, or if you are a victim of a scam that contributed to the loss of your crypto assets.

Forks

Forks occur when a blockchain protocol of a currency is changed. Forks are categorized into soft forks and hard forks.

Sometimes as the result of a hard fork you can get additional tokens to your in your wallet. HMRC derives the value of new crypto assets from original crypto assets held by an individual. You are required to adopt suitable methods provided in the Capital Gains Act of 1992 for filling tax returns of such crypto-assets. Also, these newly acquired assets will go into their respective pools for calculating their allowable cost.

Mining

If you mine for cryptocurrency as a hobby, not as a business, you have to file the market value of your crypto assets on the time you received them in your tax return as miscellaneous income. You can also include any cost you paid related to the mining process in your tax returns. You will also be liable to pay capital gain tax if you sell your mined assets. Whereas if you are a business miner, you have to file the mined assets in your income tax. You will also be liable to pay income tax on your mined crypto assets. The same rules and regulations apply to Staking and airdrops.

Reporting your assets

You have to report all your crypto assets along with any losses or other related costs in self-assessment tax returns. After you have filed your self-assessment, HMRC will send you a letter or email with a payment reference number and directions on how to pay.