Tackling Tax and Cryptocurrency
There are a number of different traders who have started getting into cryptocurrency recently. There has been a large increase in its overall popularity as more and more cryptocurrencies are made, and the market continues to grow. This growth has occurred at such a rate that it has even managed to attract those at HMRC. HMRC have updated the guidance they offer to ensure that people who invest in and use cryptocurrency are paying the correct amount of tax.
If you are investing in Bitcoin or another cryptocurrency or are thinking about doing as much, then naturally, ensuring your assets are held in a manner which is tax-efficient should be a priority. Throughout this article, we will dive into more detail about how you can ensure that all of your assets are being held in a manner which is tax-efficient, allowing you to consider the tax implications that come with owning and trading different cryptocurrencies.
How Is Crypto Labelled in UK Tax?
Before we go further into how crypto is taxed in the UK, it is first worth discussing how it is labelled. You should note that HMRC does not consider any form of cryptocurrency to be actual money. In the same vein, they also don’t consider both the buying and selling of crypto to be equivalent to gambling.
In their recent cryptoassets Taskforce report, HMRC broke crypto assets down into three different types. These are:
- Exchange Tokens: These are more commonly referred to as ‘cryptocurrencies’, which include the likes of Bitcoin, Ethereum and others.
- Security Tokens: These amount to a specified investment (as initially defined in the Financial Services and Markets Act 2000). These provide you with ownership and can entitle you to a share in future profits.
- Utility Tokens: These are tokens that can be redeemed and then used to access a specific product or service (usually done on a DLT platform).
The way that you end up getting taxed on cryptocurrency is going to vary depending on how you are using your tokens. HMRC tackles incidents on a case-by-case basis, given how much of a new area cryptocurrency is.
Cryptoasset Tax Liability
So, who is actually liable for crypto asset tax within the UK? It applies to anybody who is domiciled in the UK, which means that individuals and businesses are both liable. Even though cryptocurrency is decentralised, it is deemed that anyone who is domiciled in the UK and owns cryptocurrency has cryptocurrency located within the UK; they are therefore liable to pay taxes.
The tax is payable on any cryptocurrency which is traded, received by means of payment, mined and received as an airdrop. Not to mention, tax also needs to be paid on any crypto asset that is exchanged for another type of crypto.
What Taxes Might Need to Get Paid on Cryptocurrency?
There are a few different taxes that might be due on cryptocurrency. These include the likes of Capital Gains Tax (which applies to any crypto which is exchanged, traded or even disposed of). There are a lot of companies that are now accepting the use of crypto as payment, which means that whenever you use crypto as a means to pay for different goods or services, you are also likely going to have to pay capital gains tax.
When people receive any kind of cryptocurrency as a salary, then you find that income tax and national insurance contributions are also necessary. This applies to when you acquire some kind of cryptocurrency through the likes of mining or Airdrops in exchange for a service that you provide.
Finally, inheritance tax will also need to be paid if cryptocurrency and other assets are passed down following somebody’s death.
How Much Tax Are You Going to Need to Pay?
The amount that you will actually have to pay when it comes to paying tax on cryptocurrency and crypto assets can be reasonably complex. If you are a higher or additional rate taxpayer, then all of your assets will likely be charged at the current capital gains tax rate, which is 20%. When you are a basic taxpayer, then this rate will vary depending on what your taxable income is.
This is a bit more complicated when it comes to businesses, as if you are an organisation that is involved in crypto transactions or in the trade of cryptocurrency, then the rules on taxation are fairly convoluted. Also, depending on what type of transaction you are carrying out with crypto, your business may well be liable for VAT too.
Navigating the Complex World of Taxation on Crypto
There is no getting away from the fact that over the past decade or so, there has been a large increase in the number of people who own cryptocurrency and who use it as a form of investment and to trade with. With this increase in popularity, there have been a lot more types of cryptocurrency created, and a lot more uses for it introduced as well.
As people begin to rely more on cryptocurrency, and it proves itself to be a lot more than a phase, world governments need to adapt to ensure the use of crypto coincides with their laws. Many countries have banned the use of crypto altogether, such as Iran; however, others allow for its use so long as those using it abide by certain rules and pay the correct amount of tax.
HMRC has recently extended its guidelines to ensure that people who use cryptocurrency are also paying the correct amount of tax. They do this by assigning certain labels to different forms of cryptocurrency and using those definitions to set out what tax people are liable to pay. This can become quite complex, especially if you’re a business, so it might be worth consulting an expert.
The same applies to keeping up to date with news surrounding cryptocurrency and blockchain technology. If you want to continue to learn about how the industry is changing and what you can do to stay up to date with it, then be sure to follow blogs such as YouYaa, which are constantly discussing the market and its developments.