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What is a tax on cryptocurrency?
In the UK, HMRC treats tax on cryptocurrency like stocks, and so any realised gains are subject to Capital Gains Tax.
You can cash in, or give away, £12,300 worth of gains a year tax-free, but then pay 10% tax for basic ratepayers or 20% for higher ratepayers.
However, if you trade cryptocurrency as a business, such as mining Bitcoin, the profits from this will be liable to income tax.
Paying tax on Cryptocurrency.
If you trade cryptocurrencies for your business in the UK, then any profits are subject to income tax at normal rates. This includes mining for cryptocurrencies.
If you don’t trade for business, the crypto-assets are typically treated in the same way as stocks and shares, and so any gain made is taxable under capital gains tax (CGT).
Disposal of cryptocurrencies includes cashing in the crypto for fiat (ordinary) currency, e.g. dollars or sterling, and the transfer of cryptocurrency from one person to another.
Under CGT you have the option to cash in or give away up to £12,300 tax-free every tax year. Any extra amount cashed in or given away will be taxed. If you are a standard rate taxpayer this will be at 10%, and if you’re a higher rate payer this will be at 20%.
Limited companies will pay corporation tax on gains at the usual rate, which is currently 19%, although corporation tax is changing with a higher rate of 25%.
The point at which you will potentially become liable to CGT doesn’t just include converting into fiat currency and transferring to another person, but also includes converting it into another type of cryptocurrency, for example Dogecoin into Ripple, and exchanging the cryptocurrency for goods or services.
If you receive cryptocurrency as a non-cash payment from your employer, then this is treated as income and subject to income tax and national insurance.
If a limited company receives crypto assets as payment from a customer, then these are liable to corporation tax, and the transaction must be converted into an appropriate currency value at the time of the transaction.
VAT is due as normal on goods or services paid for with crypto assets, though not on the supply of the crypto assets themselves.
Tax on Cryptocurrency outside the UK
Other nations around the world have a wide range of different tax policies for cryptocurrencies, either through deliberate choice or a failure to update tax rules.
In Portugal cryptocurrency trade and gains are not taxed, and in Germany trading in cryptocurrencies is not taxed when you’ve held the cryptocurrency for at least a year, however, crypto trading businesses will still pay tax on profits.
In order to be a tax resident in Germany, you must work there, however, Portugal is offering a golden visa scheme to UK tax residents.
You can get a five-year residency permit if you buy a property worth €500,000 or more. You can also get one of these permits if you are retired and receive at least €1,000 a month from your pension.
It is possible to renounce UK tax status, but only if you spend fewer than 16 days a year in the UK, or 46 days a year if you haven’t been a UK resident for the previous three years.
HMRC have tightened its grip on cryptocurrencies, and people under investigation are required to declare “worldwide assets, liabilities and business interests”, which include all crypto assets.
Anything else?
If you invest in cryptocurrencies, you should plan your investment carefully. This is because of the volatile nature of the crypto market, and the long time between realising gains and having to pay the tax on them.
It is possible that by the time the tax is due in January, your other investments have dropped to the point of being worthless, and you can’t afford your tax bill.
HMRC now receive information directly from all UK crypto exchanges and platforms, so it is easier for them to track the trading and find non-disclosure more easily.
This increased interest from HMRC also means that it is more important than ever to keep proper records of purchases and transactions with your cryptocurrency investments.
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