As their values continue to soar and outperform expectations, cryptocurrencies have now established themselves as a hugely popular investment. However, while many investors are turning a tidy profit, the question as to how or even whether those profits are taxable remained until recently a little unclear.
Although HMRC has not introduced any new legislation relating specifically to cryptocurrencies, they have clarified they believe the existing legislation can be applied to the profits – or ‘gains – individual investors make whilst trading cryptocurrencies. Put simply, if you were to sell or exchange crypto tokens, you will need to pay Capital Gains Tax (CGT) if your profits exceed your tax free allowance of £12,000.
As long as you are not selling your tokens within 30 days of buying the token (different rules are applied if that is the case) the way to work out how much CGT you will need to pay is to work out your gain for each transaction. To do that you subtract the amount you paid for them initially from the amount you sold them for (alternatively if the tokens were given to you for free, you would use the current market value to work out your gain) and if your gains are over the annual tax free allowance of £12,000 you will need to pay CGT.
There are certain ‘allowable costs’ that you can deduct from your gain (and by extension reduce the amount of CGT you’ll need to pay) and these include:
- Any transaction fees paid before the transaction is added to a blockchain
- Any advertising costs relating to the sale
- Any legal/professional fees (i.e. drafting the contract of sale or obtaining an expert valuation)
However you can’t deduct any costs relating to the mining of your tokens (i.e. software, hardware or electricity) or if you’ve already claimed against your profits for Income Tax purposes.
If you work out your gains and do need to pay CGT then you will either need to complete a Self-Assessment tax return at the end of the current tax year or report your gains immediately using the use the Capital Gains Tax real time service to report it straight away.
And while it may take HMRC a little time to investigate your return, they have been at pains to stress that this is an area they are looking at so it may be that when they do get round to your return, they will want to investigate further. Although if that happens it won’t something you welcome we would suggest the process will be easier if you make sure you’ve kept records of:
- The type of token sold/exchanged
- The dates of all transactions
- The exact number of tokens involved
- The number of tokens you have left
- The value of the tokens (in UK sterling)
- Any relevant bank statements
- The addresses of any wallets used
- A record of any ‘pooled’ tokens
It’s also important to note that the CGT liability explained above covers trades in which an individual has sold cryptocurrency for a real world currency like sterling or US dollars, the rules are slightly different if the coins have been mined (mining is the term for employing software that uses algorithms to make transactions in return for tokens). If your profits have been generated by mining, HMRC will count this as a trade and will charge any profits to income tax and national insurance.
If you’d like to read the HMRC guide in full you can do so here but if you have any questions regarding the legal side of trading Bitcoin or any of other cryptocurrency please call us today on 020 7792 5649 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it..
We will help.
