We’ve been moving towards a cashless society for a decade or so now. Still, for most of us, the transactions we make involve using currencies that are backed by governments and require banks to act as intermediaries. If the current trend towards cryptocurrencies continues however, this accepted norm could be turned upside down.
Cryptocurrency is a non-physical, digital form of money — issued not by governments but by private systems. The original cryptocurrency is bitcoin, which first appeared in 2009, but thousands of new cryptocurrencies have been created since then.
Interest in this new way of transacting has been picked up by financial institutions, with some cryptocurrencies – including bitcoin, now being actively traded on exchanges.
If you’ve not quite got your head around the concept of cryptocurrency yet, this two-minute video from the BBC will help – Just How Do CryptoCurrencies work The BBC Explains in 2 Minutes.
The rapid rise of cryptocurrencies has inevitably attracted a lot of interest from private investors. Some are investing purely to speculate, while others are exploring cryptocurrencies as a way to store wealth or to protect against inflation.
It’s not for the faint-hearted. The market is prone to extreme fluctuations. Even with the more established currencies like Bitcoin and Ethereum, value swings of 10% up or down are far from unusual.
Recently, we’ve seen an increase in enquiries from clients and non-clients asking us to clarify the tax position regarding profits made from buying and selling cryptocurrencies.
To help, we’ve put together this quick reference guide to paying tax when you dispose of any cryptoassets you own:
What tax do you have to pay?
When you dispose of cryptoassets you own – either by selling them, using them to buy goods or services, giving them away to someone other than your spouse or civil partner, or exchanging them for a different type of cryptoasset, you may be liable to pay Capital Gains Tax (CGT).
It’s the last of these areas – swapping one kind of cryptocurrency for another, that can often catch people out. Because they’re not benefiting from any profit at the time of the exchange, they don’t believe HMRC needs to be informed. But this isn’t the case. As far as HMRC is concerned, disposing of the original cryptocurrency you held in this way counts as a taxable transaction and must be reported.
You’ll be liable for CGT on any gains you make over and above your annual tax-free allowance – currently £12,300 per person. Your gain (or profit) will normally be the difference between what you paid for an asset and what you sold it for (but there is a different way of calculating your gain if you sell cryptoassets within 30 days of buying them).
If you’re a higher rate taxpayer, CGT will be payable at 20% on your profits. If you’re a basic rate taxpayer, the rate at which CGT will be charged depends on the size of your gain and your taxable income.
Offsetting your tax liability – allowable costs
To reduce your tax liability, you can set certain allowable costs against your gains when disposing of cryptoassets. Allowable costs include transaction fees and expenses for advertising, valuing assets and drawing up contracts of sale.
Business Asset Rollover Relief
If you sell cryptoassets and use all or part of your profits to buy new assets, you may be eligible for Business Asset Rollover Relief, allowing you to delay the point at which you have to pay CGT. Eligibility means you won’t have to pay CGT until you sell the new asset, at which point you may have to pay tax on the gain from the original asset. To qualify, you must buy the new assets within three years of selling or disposing of the old ones (or up to one year before).
You can also claim provisional relief if you’re planning to buy new assets with your proceeds but have not done so yet.
Records you must keep
HMRC requires you to keep separate records for each disposal transaction you make. They may request to see your records at any time if they choose to carry out a compliance check
Information you must keep includes dates of transactions, type and number of tokens disposed of, balance and value of remaining tokens, bank statements and wallet addresses
Reporting & paying Capital Gains Tax
To report and pay CGT, you can either complete a Self Assessment tax return at the end of the tax year or use the Capital Gains Tax real-time service to report it straight away.
Are you considering investing in cryptocurrencies – perhaps as a hobby or maybe even as a business venture?
It’s an exciting new sector, and there is undoubtedly potential for making profits, but the risks are high too. If you are seriously considering buying and selling cryptocurrencies on any scale, you’ll need a knowledgeable guide to help you navigate this emerging marketplace.
Whatever level of investment you’re thinking of making, Inca can support you with impartial, expert help and advice on trading in cryptocurrencies. For an initial, no obligation chat call us today on 01235 868888 or contact us by email at [email protected]