Ethereum, De-Fi, yield-farming, liquidity mining, non-fungible tokens and Blockchain are just some of the words that have entered the financial lexicon in recent years. Investing and trading in cryptocurrency and other cryptoassets has become increasingly popular, however, the tax implications of these activities are often poorly understood.
HMRC has been taking an increased interest in cryptoassets, particularly in the past year where it has updated its guidance manuals and issued thousands of ‘nudge letters’, encouraging those suspected of undertaking crypto transactions to ensure all tax is paid. Therefore, it is important to be aware of your tax obligations for your crypto activities and to seek professional advice where necessary.
There is currently no specific UK crypto tax legislation. Therefore, profits are taxed in different ways depending on the circumstances and actions of the taxpayer, and Income Tax, Capital Gains Tax and/or Inheritance tax may apply:
Capital gains tax
Many people hold cryptoassets as personal investments, typically for capital appreciation or to make specific purchases. Buying and selling of cryptoassets by an individual is usually classed as investment activity (dependent on the frequency and amounts involved). In these circumstances, an individual will usually have to pay Capital Gains Tax, where gains are realised.
It is a mistake to believe that only when you sell a cryptoasset for money, that this is when it becomes a gain and therefore liable for capital gains tax. A gain can also arise when cryptoassets are exchanged (e.g. from Bitcoin to Ethereum), or when cryptoassets are used to pay for goods and services.
The calculation of gains can become complicated, particularly if other assets have been ‘disposed of’ during the same tax year.
Income Tax
Income tax and national insurance become liable on the value of the cryptoasset asset when certain criteria are met. This includes circumstances in which the frequency and nature of transactions are deemed to constitute a trading activity. Other instances include remuneration from employers, mining, and specific types of airdrops.
Inheritance tax
Cryptoassets are in the same asset class as property for inheritance tax purposes and are therefore subject to inheritance tax rules.
How RB+ can help
Given the complexity involved in properly accounting for transactions in cryptoassets, it is important that professional advice is sought to enable you to report correctly and ensure the proper amount of tax is paid. Additionally, effective tax planning should be undertaken to ensure your tax affairs are in order.
If you are seeking advice about your cryptoassets, feel free to contact any of our team for a no-obligations chat. Email Hello@rossboyd.co.uk