For a while now, Governments across the world have been cracking down on crypto taxes. For instance, there have been some high-profile investigations into Swedish crypto investors while the IRS in the United States has sent over 10,000 letters to suspect crypto tax evaders. The UK is also seeing some moves in this direction, and the HMRC (Her Majesty’s Revenue and Customs) has recently asked top crypto exchanges for details on UK-based crypto investors. Experts believe that this means that the HMRC might be heading in the same direction as the IRS.
Given this scenario, it’s probably a good time to get your crypto taxes in order. In fact, the HMRC even released a detailed report on crypto tax guidelines in March this year. These guidelines take off from previous reports from the HMRC as well as from a special Cryptocurrency Task Force (CATF), clarifying some important details about how the HMRC views cryptocurrencies. So if you’re looking to make sure your taxes have been done correctly, here are some important things you need to know:
Crypto is not considered a currency but rather an asset
The guideline says that most people hold cryptocurrency as an investment, which is why the disposal of crypto will be considered as a taxable event on which capital gains tax will have to be paid. In earlier guidelines, the HMRC had compared crypto investing to gambling but it has now explicitly stated that crypto investing is not akin to gambling, and is therefore liable to capital gains tax.
What counts as disposal of crypto
It’s important to note that the HMRC considers disposal as not only selling of crypto for fiat but also exchanging crypto for other cryptocurrency and giving away crypto as a gift. Each of these events is therefore taxable and will result in capital gains tax. When it comes to gifting crypto, the only exception is if the recipient is the spouse or civil partner of the giver.
In any other case, the pound sterling value on the date of the transaction will be taken into account for calculating the capital gains tax. Cryptoassets that are donated to charity are not subject to capital gains tax. The only exception is if the individual disposes of the cryptocurrency to the charity at a price that is more than the acquisition cost or if the donation is tainted.
How much Capital Gains Tax needs to be paid?
The good news is that overall gains up to £11,700 are exempt from capital gains tax. You only need to pay capital gains tax for gains above this amount. Also, keep in mind that if the total assets sold over the year was more than 4 times this amount (that is £46,800) you’ll have to report the gains on your tax returns, even if they are below the exemption limit. The actual tax you need to pay will depend on your income bracket and the marginal income tax rate.
Can crypto assets be subject to income tax?
You may receive crypto assets from mining activity, airdrops, or transaction confirmation awards. You may also receive cryptocurrency in lieu of salary. In each of these cases, you will have to pay income tax and national insurance contributions. You would also have to pay capital gains tax at the time of disposal of these crypto assets.
You might also have to pay income tax if you trade crypto-assets as part of a business, in which case the trading profits would be subject to income tax. The HMRC considers such a business similar to trading in shares, securities, and other financial products, and the tax treatment is also similar. The HMRC business income manual (BIM56800) deals with these kinds of trades in detail.
How much detail does the HMRC really need
The HMRC recommends that you keep detailed records of all your cryptocurrency transactions. This is particularly relevant because exchanges may not always give you detailed records going back in time. Besides, you need to convert crypto to crypto trades in terms of pound sterling by figuring out the value of the crypto at the time of sale, which means accurate record-keeping is a must. If you haven’t been keeping accurate records of your crypto trades so far, you can use cryptocurrency tax software to organize your transactions perfectly.
By when do I need to file my crypto tax returns?
The assessment year in the UK starts from April 6th and ends on April 5th the following year. Electronic returns are due by January 31st the following year (taxes are also due by this time) while paper returns are due by October 31st the same year.
The HMRC has made it a point to clarify most ambiguities around crypto taxes. More importantly, they’ve also started requesting information about crypto investors from prominent crypto exchanges. If your crypto tax returns aren’t cut-and-dried, this is the time to get your house in order, and even file amended returns if you need to. If it all seems a little overwhelming, you could also try hiring a crypto tax accountant to help sort things out and save you big bucks in the long run.
About the Guest Author
Robin Singh is the CEO of Koinly.io – a cryptocurrency tax solution that automatically generates capital gains reports for the UK, USA, Germany & Canada.
Disclaimer: The opinions expressed in this article are those of the guest author. They do not necessarily reflect the opinions or views of Bitcoin UK.