How to handle your Crypto for your Self-Assessment Tax Return
The Crypto boom has been a big talking point for the last few years and it doesn't seem to be going anywhere anytime soon. If you're an individual that's made money from Crypto, then we want to offer some insights on how to manage and report your income. The deadline for self-assessment is fast approaching so here are some things you should know as well as what you need to do if you've invested, traded or sold Cryptoassets in the UK.
This article is for individuals that own sell or generate income from Cryptoassets and does not relate to companies.
This blog was published on 25/11/2021 and is relevant to the 2020/2021 Tax Year.
Ethereum, Bitcoin, Doge, Ripple - are they treated the same?
Cryptoassets is a HRMC, FCA and Bank of England definition that brings all types of crypto tokens under one definition. Utility Tokens, Security Tokens, and Payment or Exchange Tokens are all considered the same type of asset for the purpose of taxation. This is because they are all "cryptographically secured representations of digital value".
(more info on this can be found on on the Cryptoassets Task Force (CATF) report here)
What taxes apply?
Three types of taxes apply for Cryptoassets - Capital Gains Tax (CGT), Income Tax and National Insurance Contributions.
Capital Gains Tax
The clue is in the name, but the CATF scope of cryptoassets mean that the most common tax that applies to individuals is Capital Gains Tax.
For the Self Assessment due on 31st January 2021 (covering the Tax Year between 6th April 2020 - 5th April 2021), you will be required to pay either:
10% if you are a basic rate taxpayer; or
20% if you are a higher or additional rate taxpayer
When and how is CGT applied to your Crypto?
In all CGT situations, the person, the asset and the method of disposal (selling, gifting and other methods) need to be qualified (defined by HMRC as "chargeable").
The person (you, the individual) and the asset (cryptoassets) have been covered, so what about the disposal? When does it become chargeable?
The obvious method of disposal is when you sell your cryptoassets on an exchange in return for British Pounds (GBP).
For example, Jo bought Bitcoin at £50 and sells it on Coinbase for £45,000, assuming Jo is a Basic Rate taxpayer, has used her allowances and has no expenses relating to the sale, Jo makes a capital gain of £44,950 (£45,000-£50) and will need to pay 10% on this profit and will need to pay HMRC £4495 in tax.
This is the obvious example, but if you are exchanging one token for another, how do you work out the gain? Wait I have to pay CGT on it?
For example, buying Ethereum with Bitcoin on an exchange would incur a CGT liability as they can both be classed as cryptoassets.
HMRC's cryptoassets manual has outlined that exchange between different cryptoassets could attract Capital Gains Tax liabilities in certain instances where the value appreciates between the point you bought Token A and the time at which you exchanged it for Token B.
In addition to exchanging one token for another, gifting crypto like gifting other assets can also attract Capital Gains Tax.
Income Tax & National Insurance
While CGT covers most selling events concerning crypto, you are required to pay Income Tax and National Insurance Contributions in two circumstances:
- if you receive cryptoassets by an employer as a form of non-cash payment; and
- for mining, transaction confirmations or airdrops.
There is also a case for applying Income Tax to the buying and selling of Cryptoassets at a frequency high enough to be considered financial trading akin to trading shares on the markets. If HMRC agree that the individual is trading rather than investing then CGT would not apply on the trading activity of the relevant crypto assets. Details on this will not be covered in this article due to the complexity and the need for anyone reading this to get professional tax advice.
How can I reduce my tax liabilities on my crypto?
- This is where we repeat the disclaimer at the beginning of this post - Cryptoassets are complex and if you do not have professional tax advice, it is advised that you seek help from someone who knows what they are doing, we do but this blog isn't tax advice.
As with all CGT and Income Taxes there are allowances, and you can also claim expenses against the Income or Gain.
For Capital Gains Tax
You have an allowance of £12,300
You can claim expenses for fees on exchanges like Coinbase and Kraken and costs on mining activities (you can find more information on HMRC's Cryptoassets Manual)
For Income Tax
You have an allowance of £12,500
You can claim expenses on mining costs and appropriate costs to "miscellaneous income". This means that any costs of earning crypto via certain types of airdrops, crypto trading and mining that are legitimate and reasonable in the opinion of HMRC can be claimed. This is complex and subject to change as the world of Crypto evolves and HMRC's tax rules. Again please refer to HMRC's cryptoassets manual here.
If you want to speak with an expert today, get in touch via our website.