If you are one of the (reportedly) millions of people in the UK investing in various types of crypto like Bitcoin, Ethereum, Litecoin, Dogecoin then you may be wondering what is your UK tax position?
Currency or not?
Back in 2012, HMRC changed the UK taxation reporting rules on traditional foreign currency like dollars & euros. No longer was exchanging your foreign currency for another currency seen as a taxable disposal event for an individual.
So far so good right?
Unfortunately, HMRC have confirmed that crypto currencies are not considered currency for taxation purposes. They are instead taxable like other assets such as shares and property.
Disposing of crypto currency into either traditional currency or another form of crypto currency is taxable as a disposal. For most people who buy crypto as a ‘personal investment’ this will be reported as a capital gain or loss.
The valuation in pounds sterling of the proceeds and costs, used to calculate the gains or losses to report on your tax return. This should be based on ‘appropriate exchange rates’. On the dates of the purchases and sales and the type of crypto currency being transacted.
Normal share matching rules apply. This means that the value of coins sold are matched with those purchased in the following order:
- Same Day Rule
Coins acquired on the same day as the disposal are ‘sold’ first.
- Bed and Breakfasting Rule
Coins acquired in the 30 days following the day of disposal are then deemed to have been ‘sold’ next.
- Section 104 pool
All previous coins purchased, price averaged, are ‘sold’ next.
Many of the major exchanges will provide a gains and losses report. Care should be taken to link up, all assets held elsewhere in wallets and other exchanges. Otherwise you could end up with an incorrect and potentially higher tax liability.
The capital gains exemption of £12,300 will be available each tax year to mitigate any capital gains. This will result in taxable gain chargeable at 10% or 20%, depending on the remaining availability of your basic rate income tax band.
Exchanging coins within the wallet
For many investors, there may be problems funding tax charges if they exchange one coin (such as bitcoin) for another (such as Dogecoin) inside their digital wallet. Such an event would give rise to a likely sizeable capital gain given the huge rise in bitcoin value seen over the last year. However no actual ‘real’ cash has been realised to pay for the tax due and no rollover relief is available. Many investors may make hundreds or thousands of such transactions over the course of a tax year.
It’s unlikely for an individual to be deemed a professional crypto trader, albeit that is a possibility and depends on the frequency, level of organisation and intention of the activity.
If you were to be deemed to be a trader, then the net gains from trading and disposing of crypto currency would be taxable as income (at 20%, 40% & 45%).
Any payment or interest received for ‘staking’ crypto currency is taxable an income regardless of your trading or investor status.
This is the same tax treatment as coins earned from ‘mining’ new coins – the fair market value of the coin mined in pounds sterling is taxable when possession of the coin is earned.
HMRC have stated that the location of crypto assets follows the residency position of the individual. This is contrary to normal rules looking at the situs of other assets like shares and may ultimately be challenged.
Non-domiciled individuals who are tax resident in the UK can take advantage of the remittance basis of taxation. Keeping offshore income and gains outside the scope of UK taxation if they do not remit such income and gains to the UK.
For now, crypto currency does not appear to be a type of asset that can facilitate non-domiciled individuals taking advantage of the remittance basis of taxation. If an individual is resident in the UK, then their crypto gains are taxable in the UK.
HMRC have updated their ‘statement of assets’ form and will now include explicit demands for information on crypto currency assets. They will request a list of assets from taxpayers in an investigation.
Recent reports also confirm that HMRC have successfully lobbied Coinbase, the largest crypto currency exchange service. Coinbase have disclose asset information on all account holder with UK addresses to HMRC. They are expected to reach similar agreement with other major exchanges.