Crypto currencies - Detailed Guide
There has been an enormous increase in interest in cryptocurrencies, with significant opportunities for investors. However, like any form of gain, the tax consequences of trading must be considered. In this guide, we deal with the potential implications of dealing in cryptocurrencies.
How to treat gains and losses
Until December 2018, there was a chance that your gains could be categorised as 'gambling' gains or losses (i.e. tax free). However, recent changes in HMRC guidance mean that this is no longer the case. Cryptocurrencies have become much more mainstream, with broker reports available, and are therefore no longer considered to be gambling.
Now that we have covered gambling, there are two other ways to treat gains or losses and this depends on your trading status. The majority of individual investors will be trading in cryptocurrencies on a part time basis outside of their usual business or job. If this is the case, then cryptocurrency gains/losses will be treated as capital, meaning that gains above the annual exempt amount (£12k in 2021/22) are taxed at 20% (see rates here). This will need to be reported on your tax return if there are taxable gains to report, i.e. if you realised gains more than the annual exempt amount of £12k or if the total amount of funds you have realised are more than four times the capital gains annual exemption.
However, if you are a professional trader and meet the below (quite stringent) criteria, then these could be categorised as trading gains/losses, which are taxed like general income and are usually at a higher rate than capital (see rates here). Note that hedge funds and trading firms should always be making trading gains/losses.
Criteria to qualify as trading gains/losses:
- The investor must undertake the activity on a full-time basis;
- The investor should have a strategy, however unsophisticated, that they execute against;
- The investor should have a business plan, ideally a written business plan; and
- The taxpayer should undertake some basic bookkeeping.
Calculating gains/losses on cryptocurrencies
There are several aspects to consider when calculating gains made on cryptocurrencies:
- All transactions must be calculated and reported in sterling.
- Each type of cryptocurrency needs to be treated as a separate class of asset and be “pooled” together;
- The number of transactions in the year may be large, and there is unlikely to be a consolidated broker’s report which calculates the gains for you across different types of crypto, especially if you use multiple platforms. This means that you need to keep your own detailed records in order to track your overall gains/losses position.
Where to tax cryptocurrencies
Given their relative novelty, there has been very little authoritative case law on where a bitcoin is situated for tax. However, HMRC's viewpoint is that the bitcoin is situated where the individual who owns it is a resident (i.e. the UK if you are a UK tax resident). There are potential arguments that a bitcoin is 'code' and is therefore situated where it was created (i.e. where mined). Any UK tax resident wishing to take this standpoint should do so in the knowledge they will be heading for a dispute with HMRC!
For the majority of investors, the tax treatment of cryptoassets is relatively simple. Gains/losses are treated as capital gains/losses and are taxable in the UK. Complications may arise if you use multiple platforms and buy many different types of cryptocurrencies, as it then becomes difficult to track your overall gains and losses. If you have any questions or need clarification, please do not hesitate to get in touch.