Cryptocurrency: how to report and pay the right amount of tax

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Date: 15 February 2022

Reporting gains on crypto currencies

In October 2021, HMRC was reportedly planning to send out "nudge letters" to holders of cryptocurrency (also called crypto assets or just crypto), reminding them to check that they were reporting correctly and paying the required amount of tax.

Obviously, HMRC wants to prevent tax underpayment by the 2.3 million people in the UK now believed to have crypto holdings. You may be among them and want to be sure that you're reporting properly and paying the right amount of tax. Or you could be thinking about investing in cryptocurrency and want to know what your obligations would be regarding reporting and paying tax.

This guide explains:

  • What crypto assets and cryptocurrency are.
  • When cryptocurrency is subject to Capital Gains Tax.
  • When cryptocurrency is subject to income tax.
  • What records you need to keep for tax purposes.
  • How to report crypto gains or income.

What are crypto assets/cryptocurrency?

HMRC defines cryptocurrency/crypto assets as: "Cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically."

Chances are you've heard of Bitcoin, the world's best-known and most widely held cryptocurrency. More than 60% of UK cryptocurrency investors have Bitcoin holdings, but other examples include Ether, Litecoin and Ripple.

Cryptocurrencies are digital assets, they're not physical currency. You can't buy things in the shops with them, and they have no inherent value, they're worth whatever someone is willing to pay for them. A crypto token is a denomination of a particular cryptocurrency and they each have different values. As with other assets, cryptocurrency value can go up or down.

Cryptocurrency is bought and sold via secure peer-to-peer online networks or exchanges. According to HMRC, the tax treatment of cryptocurrency depends on its nature and use. Basically, if you're given crypto or earn income from crypto trading, it can be subject to income tax. If you dispose of crypto by selling, exchanging, or giving it away, it can be subject to capital gains tax (CGT).

When is cryptocurrency subject to capital gains tax?

Obviously, people invest in cryptocurrency hoping that its value will increase over time. If it does, you make a gain, that's why CGT can be payable if you dispose of cryptocurrency tokens by:

  • selling them
  • exchanging them for other crypto assets
  • using them to pay for good or services
  • giving them away (unless it's to your spouse or partner) or
  • donating them to charity.

Your gain is the difference between how much you bought the crypto for (including any transaction fees) and sold it for. If someone gives you cryptocurrency tokens upon which you later need to pay tax, to work out your gain, you must find out their market value when they became yours.

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How much CGT is payable on cryptocurrency?

Once your total taxable gains go over the CGT tax-free allowance threshold – £12,300 for the 2021/22 tax year – you'll be taxed as follows:

  • If you're subject to basic rate income tax (ie with taxable earnings of £12,571-£50,270 a year), you'll pay CGT of 10%, then 20% on gains that take you above £50,270 in taxable earnings.
  • If you're a higher or additional rate income tax payer (ie with taxable earnings of more than £50,270 a year), you'll pay 20% CGT on your crypto gains over and above the CGT threshold.

To find out whether CGT is payable after selling cryptocurrency, you need to calculate your gain for each transaction.

Some allowable expenses are deductible for CGT:

  • "transaction fees paid before the transaction is added to a blockchain"
  • "advertising for a buyer or seller"
  • "drawing up a contract for the transaction"
  • "making a valuation so you can work out your gain for that transaction"
  • "a proportion of the pooled cost of your tokens when working out your gain".

Need to know!

  • CGT is not due on crypto losses, but you can use these to reduce other crypto gains and any tax liability, providing you first report them to HMRC. Losses aren't capped.

How to report and pay Capital Gains Tax on cryptocurrency

To report and pay CGT on cryptocurrency you can either complete a self assessment tax return following the end of the tax year or use the real-time CGT service to report and pay straight away.

You must keep separate records for each cryptocurrency transaction detailing:

  • token type
  • disposal date
  • number of tokens disposed of
  • tokens remaining
  • value of the tokens in pound sterling
  • bank statements and wallet addresses
  • pooled costs before and after you disposed of them.

Need to know!

  • HMRC can ask to inspect your cryptocurrency records if it decides to carry out a compliance check.

When is income tax payable on cryptocurrency rather than CGT?

Income tax and National Insurance contributions (NICs) can be payable on cryptocurrency if your employer gives you them as a non-cash bonus or benefit (this could apply to those who mix employment with self-employment). If you need to pay income tax on income from crypto for this or other reasons, you'll need to register for self assessment, if you're not already registered.

If you occasionally dabble in crypto, you'll probably only have to pay CGT on disposal. However, if you trade regularly, HMRC will consider you to be a crypto trader and you'll need to report your income via self assessment and pay any income tax and National Insurance that's due.

If you've paid income tax on crypto, CGT isn't payable unless you later dispose of your tokens, when CGT will be due on the gain made since you reported for income tax.

Many crypto assets are traded on exchanges that don't use pounds sterling. If so, the value of any gain or loss must be converted into pounds sterling when you're completing your self assessment tax return. You'll need to use supplementary page SA108 to detail crypto capital gains/income and losses claimed within your SA100 tax return.

Need to know!

  • Failure to report cryptocurrency gains or income to HMRC can lead to penalties. You'll still have to pay any tax you owe plus interest.

More information

Visit government website GOV.UK to download HMRC's crypto assets manual. It sets out the tax rules for both individuals and businesses that invest in cryptocurrency.

Sponsored post. Copyright 2022. Featured article by Mike Parkes of GoSimpleTax - tax return software that can help you manage your self assessment.

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