Ultimate Crypto Currency Tax Guide

The recent surge in price of Bitcoin may have led many investors to consider their cryptocurrency portfolios and whether to partake in profit taking.

If you are considering this you must also think about the tax implications. As HMRC does not recognise cryptocurrency as a currency or money any gains will be subject to taxation.

There are three types of tokens:

1. Security tokens — give the holder the right to profit and loss in a business venture
2. Utility tokens — provide the holder with the right to access to a good or service
3. Exchange tokens — used to make payments (e.g. bitcoin)

Tax Treatment of cryptocurrency gains

This depends on whether you hold the cryptocurrency as an investment or whether you spend your time trading the tokens on exchanges.

If you hold the cryptocurrency as an investment then any profit/loss will be treated as a capital gain/loss. Of which you can take advantage of personal capital gain allowances of £12,300 (2020/21).

If you trade on a regular basis then any gains/losses will be taxed as income.

The following events will trigger a gain/loss:

1. selling cryptocurrency for money
2. exchanging cryptocurrency for a different type of cryptocurrency
3. using cryptocurrency to pay for goods or services
4. giving away cryptocurrency to another person

Capital losses can be pooled and offset against current year capital gains or carried forward to offset against future gains. Trading losses will be subject to normal business loss relief rules.

Share pool accounting

In order to calculate gains/losses HMRC share pool accounting to take place. Below sets out the following three rules to be followed in order when calculating sales event has taken place:

1. Same Day Rule: coins acquired on the same day as the disposal are consumed first
2. Bed and Breakfasting Rule: coins acquired in the 30 days following the day of disposal (provided the person making the disposal was resident in the United Kingdom at the time of the acquisition)
3. Crypto-pool: all previous coins purchased, price averaged

Other taxable considerations

Receiving remuneration in cryptocurrency - Payment in return for employment is taxed as normal employment and subject to Income Tax and National Insurance.

Forks – A fork occurs when you receive additional cryptocurrency based on existing coins. There is no preferred method to treat the gains on these coins. You could use one of the following methods but must use them consistently.

• Original coin maintains 100% cost basis, new coin(s) take zero basis
• Pro-rate basis across all coins new and old, based on the price at the time of the split
• Pro-rate basis across all coins new and old, based on the price at the time of gaining control of the coins

Airdrops

This where you receive free coins into your wallet for taking part in advertising/marketing campaigns. If you are a personal investor then this will not be subject to income tax, however will be subject to capital gains tax with a nil base cost

Traders will be subject to income tax on the value received and any subsequent gains/losses.

Mining

If you are mining as a hobby then the value of any mined coins will be taxed as miscellaneous income and subject to Capital Gains Tax on any future disposal.

If you mine as a business then the income will be subject to income tax and again so will any profit/loss of future sales.

Donations

Any cryptocurrency donations will not be subject to Capital Gains Tax as long as it is to a registered charity subject to not receiving an incentive in return for the donation.

Failed cryptocurrency

If a cryptocurrency fails you may be able to claim a Capital Loss you will need to inform HMRC of asset subject to the claim, the amount of the asset to be treated as £0 and the deemed date you treated as the disposal date.

Losses due to being scammed – Unfortunately HMRC does not recognise this as a disposal and will not allow a capital loss.

Losing public/private keys

There have been some high profile examples of people losing their keys and no longer being able to access their coins and as such if you can prove this loss to HMRC you will be able to claim a loss against your tax.

Reporting Income and capital gains

Capital gains only requires reporting if gains exceed annual exemption or sales proceeds exceed 4 times the annual exemption (currently £12,300 2020/21).

Capital gains and income need reporting on your personal tax return reports from 6^th April to the following 5^th April and filing to HMRC is required the 31^st January following the 5^th April.

This article is in no way a recommendation to purchase cryptocurrency, cryptocurrency is a very volatile investment and should be done after seeking professional financial advice.