Cryptocurrencies have been very much at the forefront of many people’s discussions over the past year. Elon Musk continues to rave about Dodgecoin and Cardano, the ‘green’ cryptocurrency being touted as the future.
The main cryptocurrency Bitcoin, having increased in value by as much as 600% over the past year, has made fortunes for many. Side Note: As we type this, China has banned the use of Cryptocurrencies by financial institutions and payment companies causing Bitcoin to fall in price 22% in value.
But, is it a great way to save taxes, or just another taxed income? The short answer, is unfortunately, the later.
The typical cryptocurrency investor is that done by an individual, holding the cryptocurrency for capital appreciation. Selling at a later date for a higher price than what it was once purchased for. Any gain made on disposal is liable to Capital Gain tax, if the gain is over your tax-free allowance of £12,300.
The rate you will pay, will be dependent on your other earnings and the gain you have made.
- If you are a higher rate tax payer, you will pay 20%.
- If the gain, with your other income is within the basic rate band to £37,700 (less your personal allowance), you pay 10%.
As an example; You have taxable income (income less your personal allowance) of £30,000 and you have a taxable gain on cryptocurrencies of £13,000.
Deduct your CGT allowance of £12,300. This leaves you with a gain of £700.
When you add this to your taxable income, as the combined amount if £30,700 (£7,000 below the basic rate band). You will pay Capital Gains tax at 10%.
You will therefore have a Capital Gains tax liability of £70. Quite a lucrative return.
The above is of a course a very simple example. With gains worked out differently if you sell Cryptocurrencies withing 30 days of buying them. We would always recommend seeking additional advice for this, if this applies to you.
As a basic investor however, it is worth noting, as with any asset, you can deduct costs associated with the eventual sale or the initial purchase. Any expenses can be deducted from your gain, lowering your CGT liability. Such costs can include;
- Transaction fees
- Professional fees (Consultancy costs)
- And advertising to name a few.
Cryptocurrency gain or Cryptocurrency profit?
Typically, for standard Capital Gains deductions, you are not allowed to deduct the costs of mining (normally computer hardware). Mining Cryptocurrencies, by yourself, with one computer, is generally not an indication of trading to HMRC. Once mined, you must class the value at market value, when it came into fruition, for capital gain purposes. If however, you have purchase several computers and run an operation, HMRC would deem this to be trading and as such, whilst the costs of computers can be deducted in this instance, you will be paying either income tax or corporation tax, depending on the entity you trade via.
In addition, with many businesses now accepting Cryptocurrencies as a form of money for their sale, and individuals now accepting cryptocurrencies as a form of remuneration, it is worth noting, such transactions are classed as taxable income. When an individual has been paid in Bitcoin as an example, they would have to be paid this after income tax (an exchange rate would have to be applied for the date of the transaction). For said individual, whilst no Capital gains tax would be required to be paid, should any gains be made thereafter, a liability may arise.
What if I make a loss?
As with anything however, what goes up, can come down. Cryptocurrencies can be seen as a volatile and risky investment. Not only the price swings, but, with the online nature of transaction, fraud and the loss of monies can be quite prevalent, with its online nature. It is unfortunate therefore, that we have to report, HMRC does not class any theft of Cryptocurrencies, as a disposal against any Capital Gain tax.
If however, a loss is made in the usual manner of buying and selling, then the loss can be offset against other gains.
Cryptocurrencies are a complicated concept. Whatever your view, we always recommend keeping the best records you can;
- Note the type you hold.
- Make note of the value in sterling, when you purchase the currency and the date.
- Details of bank statements used and wallet addresses
- The number of cryptocurrencies you hold and have held.
- The date of disposal and the sterling equivalent.
HMRC has been slow on the uptake, however, they do have the power to request details of your online wallets and bank transactions. By keeping the appropriate records and seeking the proper advice, it may just save you a costly mistake. You can find more advice via: https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual
For more on this, or anything else, don’t hesitate to contact us here at AME for a free consultation.