Cryptocurrencies are digital currencies that are not directly regulated by any government. Instead, they function with the help of online decentralized ledgers. This gives them a greater level of freedom, security, and profitability, in general, compared to fiat currencies. This has led many crypto investors to believe that cryptocurrencies are free from tax liabilities, but this is far from the case.
Any transaction using a cryptocurrency becomes taxable as per HMRC rules if the benefits and value cross the exemption threshold and fall into the taxable range, just like gold, silver, or any other investment. Read on for more on what you should know about cryptocurrency and taxation in the UK. Note this is general information and is not intended in any way to be financial advice – it’s always a good idea to seek professional advice relating to your own individual situation.
What kind of taxes apply to cryptocurrency?
In general, income tax and capital gains tax are the two types of taxes that are applicable to cryptocurrency. However, there may also be exceptions in certain cases. For tax considerations, cryptocurrency will be treated as any other property or asset holding a certain value. If you receive cryptocurrency from any source, it becomes your income and the rules of income tax as per HMRC rules will apply to it.
Additionally, if you use your crypto assets to yield any benefits later, you will also become liable to pay capital gains tax. These taxes are applicable only if the value or benefit of the cryptocurrencies, along with other assets, will be in the taxable range. Assessing whether your crypto investments are taxable, and calculating how much you need to pay as tax may be a confusing and tedious job when you need to consider crypto assets along with your other assets. Therefore, it can be a good idea to seek advice from an accounting firm that offers specific crypto-asset services such as Hodge Bakshi.
When do you need to pay income tax on cryptocurrency?
Your cryptocurrency activities can make you liable to pay income tax when you receive cryptocurrency as a new income or dividend, or for free in some instances. You may get paid in cryptocurrency from certain sources for your services. You may also earn cryptocurrency through crypto mining or as interest through DeFi (Decentralized Finance) investments.
Referral bonuses, airdrops, and similar that you receive from organizations that want to promote a new cryptocurrency can also get added to your income. All such cryptocurrency you receive, along with your general income, makes you liable to pay income tax if the total value during the tax year falls in the taxable range.
When do you need to pay capital gains tax on cryptocurrency?
When you use cryptocurrency for transactions that involve a capital gain, you become liable to pay capital gains tax, if the value falls in the taxable range as defined by HMRC. This typically occurs when selling cryptocurrency in exchange for fiat currency, swapping one cryptocurrency with another (like paying Bitcoin to receive Ethereum), using cryptocurrency to purchase commodities, or gifting cryptocurrency to someone else.
How is the location determined for taxation?
Cryptocurrency is digital money that has no physical existence. The value of cryptocurrency resides within a blockchain network online which constitutes a decentralized ledger operated by many crypto holders spread around the globe. So, how is the location of cryptocurrency determined for the purposes of taxation? The HMRC considers cryptocurrency to be present in the UK if its owner resides in the UK. This applies to both UK residents and domiciled non-UK individuals.
How does taxation apply to trading with cryptocurrency?
Cryptocurrency trading is not considered an investment. Instead, it comes in the ambit of business and so the taxation rules of business apply to cryptocurrency trading. However, many different factors need to be considered for an accurate assessment in such cases.
Is cryptocurrency liable for inheritance tax?
Cryptocurrencies and other forms of crypto-assets such as NFTs are treated as property. Therefore, any tax rule that applies to the property will also apply to cryptocurrency and if one individual inherits crypto assets from another, inheritance tax rules apply to the inherited crypto assets if it is beyond the inheritance tax threshold. Tax will be collected from the assets transferred and the beneficiaries will not have to pay it separately. However, they will be liable to pay taxes if they make revenue from the inherited assets. As with general inheritance rules, if the assets go to charity, inheritance tax does not apply.
Though cryptocurrencies as such have no specific taxation rules in the UK, general tax rules apply, as they are considered assets like any other. Additionally, these days, cryptocurrency is not the only crypto asset. Many other variants, such as NFT (Non-fungible token) which also works based on blockchain technology, are also taxable. As tax assessments can be confusing, it is generally a good idea to seek advice from a professional tax consultant to know where you stand and whether the crypto assets you hold are taxable.
Jason is the Marketing Manager at a local advertising company in Australia. He moved to Australia 10 years back for his passion for advertising. Jason recently joined BFA as a volunteer writer and contributes by sharing his valuable experience and knowledge.