Tax season is here in the U.K. — and it’s time crypto investors buckled down to file their cryptocurrency tax returns correctly. There have been a lot of indications that the U.K.’s Her Majesty’s Revenue and Customs (HMRC) is starting to take a stern view of crypto tax evaders.
The first cryptocurrency guidance was released back in 2018 after a special report was submitted by the Cryptoassets Taskforce — an initiative launched by the HMRC in collaboration with the Financial Conduct Authority (FCA) and Bank of England. These guidelines clarified some important details about how HMRC views cryptocurrencies, which many see as a prelude to a stricter approach toward crypto taxation.
HMRC also sent requests to some major crypto exchanges (including Coinbase) for information about their U.K.-based investors in August of 2019. This is exactly what the United States’ IRS did before they sent out warning letters to suspected crypto tax evaders.
All this is to say that HMRC looks to be fairly serious about crypto tax evasion — which means that tax filings will become especially important this year. Here are some of the most important things you should know about crypto taxes in the U.K.
Cryptocurrency Is an Asset
For all practical purposes, cryptocurrency is a digital currency. However, when it comes to taxation, HMRC looks at cryptocurrency as an asset. This means that disposal of crypto is subject to Capital Gains Tax. This categorization is being widely adopted by tax agencies; even the U.S.’s IRS views cryptocurrency as property for tax purposes instead of a currency.
When Are Crypto Transactions Taxable?
HMRC says that you need to pay capital gains tax on every disposal of cryptocurrency. Disposal here refers to the following:
- Sale of cryptocurrency for fiat currency (like pound sterling);
- Exchange of cryptocurrency for another cryptocurrency (e.g., selling bitcoin to buy ether); and
- Gifting of crypto to someone other than a spouse or civil partner. The value of the crypto on the date of the gift will be taken as the sale value in this case.
It’s important to keep in mind that charitable donations of crypto are not subject to capital gains tax. Of course, if the donation is tainted or if it the crypto is sold to the charity at a price greater than the acquisition cost, then capital gains tax will apply.
How Much Tax Do You Need to Pay?
The actual capital gains tax to be paid will depend on your income tax bracket and the marginal tax rate. Keep in mind that there is an exemption limit of £11,700: If your gains are lower than this amount, you don’t need to pay any capital gains tax.
If you end up selling crypto which is more than four times the exemption limit (or over £46,800), you will still have to report the capital gains in your tax returns — even if the actual gains are below the limit. Cryptocurrency investors can use Koinly crypto tax software and similar tools to determine the tax they need to pay.
By doing so, tax reporting is a lot easier and more accurate. Users can link their crypto exchange accounts, and the crypto tax software can calculate the capital gains immediately. This tool can also generate a tax report in just a couple of minutes.
How Is the Capital Gains Tax Calculated?
In the U.K., cryptocurrency gains are calculated using share pooling. Most people are familiar with accounting methods such as FIFO and LIFO when it comes to taxes. However, share pooling is quite different and involves using the average cost of all current assets to determine the cost of the assets being sold.
There are also additional rules like the same-day rule and the 30-day “bed and breakfasting” rule that are used to prevent tax-loss harvesting or the practice of selling assets at a low price and rebuying it afterward to sustain taxable losses.
Airdrops, Mining, Staking and Other Forms of Crypto Income
Crypto transactions also happen in other forms, for instance:
- Miners receive crypto in exchange for mining cryptocurrencies.
- Users may receive cryptocurrency through airdrops.
- Certain employers pay their employees and freelancers with cryptocurrency rather than fiat currency.
In each of the above cases, you will have to pay income tax and national insurance contributions. When you dispose of the assets, you will also have to pay capital gains tax in a similar manner as discussed before. It is important to separate the source of your crypto assets when preparing crypto taxes in the U.K. as HMRC has specifically classified hard-fork proceeds and airdrops as income.
Cryptocurrency Trading as Part of a Business
Cryptocurrency trading requires that you set up a trading account, especially if you plan to make it a part of your business. Traders can buy and sell cryptocurrency coins through an exchange and is usually based on the trader’s speculated price movements. Cryptocurrency markets are decentralized and run across a computer network but they aren’t backed up by the government or central authority. However, investors can trade cryptocurrencies via exchanges and store their crypto earnings in ‘wallets.’
If you trade cryptocurrencies as part of your business, then trading profits will be subject to income tax. This kind of trade is similar to trading in securities, shares, and other financial instruments — the HMRC Business Income Manual (BIM56800) deals with these transactions in detail.
Keep Accurate Records of Your Transactions
HMRC recommends keeping detailed records of all your crypto transactions. Since even crypto-to-crypto trades are taxable, you will need to figure out the value of the crypto at the time of sale — which could prove very time-consuming if you are running bots.
Another thing to consider is that crypto exchanges don’t always provide complete records, so it’s best to be proactive and keep a log of your trades. Nowadays, there are also tools such as Koinly, Cointracking, Lukka (formerly Libra), BitcoinTaxes and others that can help you with your record-keeping for tax purposes.
When using cryptocurrency to pay vendors, you need to record all transactions to serve as a reference when you decide to sell them in the future. This way, you can distinguish your capital gains by being able to compute the difference between the digital asset’s book value and the expense.
If you engage in mining activities, your ledger will categorize it as an income-generating activity. Accordingly, you need to credit any mining income account. In the same way, you should debit any newly generated crypto asset at its fair market value in your books.
The Bottom Line
Given that HMRC has made it a point to clarify regulations around crypto taxes and has also started asking for information about U.K.-based traders from crypto exchanges, it’s high time to get your affairs in order. If your crypto tax returns aren’t completely up-to-date, you should use this year to get things sorted — even filing amended returns if you need to. The tax returns for the 2018–2019 tax year are due at the end of January!
This is a guest post by Robin Singh, founder of Koinly, a cryptocurrency tax startup. Views expressed are his own and do not necessarily reflect those of Bitcoin Magazine or BTC Inc. This article is for information purposes only and should not be construed as financial or tax advice. Consult with a tax professional to properly assess your particular tax situation.