Cryptocurrency—it’s the buzzword that has been popping up everywhere, but what is it exactly? And more importantly, how does it affect your taxes? Think of cryptocurrency like digital cash that exists only online. Unlike regular money, cryptocurrencies like Bitcoin and Ethereum run on a decentralised network called blockchain, which keeps everything secure and transparent. It may sound like an intriguing prospect but, when it comes to taxes, things can get a bit tricky.
How is Cryptocurrency Taxed in the UK?
In the UK, cryptocurrency is not treated like actual money for tax purposes. Instead, it is seen as property, which affects how HM Revenue and Customs (HMRC) tax it when you buy, sell, or use it.
- Capital Gains Tax (CGT): If you buy some crypto and later sell or exchange it, you might have to pay Capital Gains Tax. This applies if you sell your crypto for pounds, swap it for another cryptocurrency, or even use it to buy something. The taxable gain is the difference between what you paid for the crypto (including any fees) and what you got for it when you sold or traded it. If your total gains from selling or trading crypto go over the annual CGT allowance (currently £3,000 for the 2024/25 tax year), you will have to pay tax on the excess. How much tax you pay depends on whether you are a basic rate taxpayer (10%) or in the higher/additional rate bracket (20%). If your crypto investments do not go as planned, you can use those losses to offset gains in the same tax year or carry the losses forward to reduce future gains. Any losses need to be reported to HMRC to enable them to be utilised.
- Income Tax: If you are being paid in cryptocurrency, whether from an employer or from mining, it is considered income. The value of the cryptocurrency at the time you receive it has to be converted to GBP and reported as part of your income for the year. If your crypto activities look more like a business (lots of buying and selling), HMRC might decide you are trading and tax you differently. If considered trading and you incur losses from crypto, these can be used to offset other types of income in the same tax year or can be carried forward to offset profits in future tax years or can be carried back in certain instances. If not considered trading, the use of any crypto transaction losses is more restrictive.
- Corporation Tax: For businesses dealing with cryptocurrency, any profits are subject to Corporation Tax. Companies need to include these in their regular accounts and the usual rules for calculating profits and losses apply. If a company incurs losses from cryptocurrency transactions, these losses can be used to offset other taxable profits, thereby reducing the overall Corporation Tax liability.
Reporting Requirements
HMRC expects you to keep detailed records of all your cryptocurrency transactions. This includes dates, amounts, the value in GBP at the time of each transaction, and what the transaction was (buying, selling, or swapping). Keeping good records is key to making sure you pay the right amount of tax and are ready if HMRC comes knocking.
Conclusion
Cryptocurrency might seem like a whole new world but, when it comes to taxes, the same rules apply: keep good records, know your obligations, and plan ahead. If you are not sure how your crypto activities might impact your taxes, please contact us. We’re here to help you navigate this digital landscape with confidence!
If you have any queries and would like assistance please contact Emily Jones on 01633 654158 or email Emily.Jones@kilsbywilliams.com. Alternatively, please contact your usual advisor or call us on 01633 810081 or email info@kilsbywilliams.com
