- Taxation of Cryptoasset Profits
Taxation of Cryptoasset Profits
Taxation of Cryptoasset Profits8th January 2021 - Published by Kuits Tax Investigations & Fraud team
With record highs for the value of Bitcoin and other cryptocurrency assets and associated profit taking, the taxation of profits must be considered by every investor.
When crypto assets first emerged it was unclear as to the correct taxation of crypto profits. Some argued investing in such assets was akin to gambling and was not taxable at all. However HMRC has issued guidance on their view on the taxation of such profits.
The guidance makes it clear that for individuals in most cases crypto gains are taxable to Capital Gains Tax rather than Income Tax or not being taxable at all.
In some circumstances Income Tax might apply for example if someone is day trading crypto assets and this needs to be carefully considered prior to completing tax returns. One area that wouldn’t currently be taxable is spread betting on crypto assets.
What are common investor mistakes?
The most common mistake crypto investors make is thinking that it is only when crypto assets are converted into fiat currencies that a taxable event occurs. HMRC are clear that trading one cryptocurrency for another triggers an individual taxable event.
This can lead to some taxpayers having multiple tax events through the year as they move between currencies of balance portfolios without ever converting the currency into fiat.
The UK Tax year runs 6th April to 5th April the following year. Assuming Capital Gains Tax applies then total net gains less total net losses on disposals during the tax year are taxable.
There is an annual Capital Gains Tax allowance per individual each year, £12,300 for tax year 20/21, which is tax free. This can be deducted from the overall net gains before tax is calculated assuming the allowance hasn’t been used against gains on other assets disposed of.
Tax is then at 10 or 20% or a mixture of both depending on what income the taxpayer has. The tax is payable on the overall net gains less the available annual allowance.
Where net losses are made in a given year it may be possible to carry those losses forward or backwards to other tax years or use them against gains made on other assets but the rules on this can be complicated.
Points to note
The above tax treatment may differ for the following individuals:
- Those resident but not domiciled in the UK
- Those not resident but domiciled in the UK
- Those neither resident nor domiciled in the UK
If overall net gains exceed the available annual allowance or if total disposals, whether creating a gain or loss, exceed four times the annual exemption then a tax return must be completed including the Capital Gains tax pages and submitted by 31st January of the year following the tax year in question, e.g. disposals in tax year 19/20 must be reported by 31st January 2021.
The tax is also payable by the 31st January and there are penalties for late filing and interest for late payment of tax.
Where tax returns and tax have not been paid and submitted by the 31st January deadline it may be possible to submit late returns but a disclosure to HMRC may be necessary to deal with historic taxes.
It should be noted that dependant on behaviours HMRC can go back up to 20 years for unpaid tax and can levy penalties of up to 200% of the tax due.
Some investors may take the view that HMRC won’t become aware of crypto profits and therefore choose to ignore any tax issues they have. There are various ways HMRC will become aware of crypto assets including:
- Reports directly from banks where transfers to or from crypto exchanges occur
- HMRC becoming aware of ownership of other assets funded by crypto profits
- Information obtained by HMRC directly or indirectly from crypto exchanges
Penalties are much lower and disclosure periods often shorter where voluntary disclosures are made. Deliberate failure to return crypto profits may lead to criminal investigation and prosecution.
Given that gains on crypto assets can be substantial early consideration should be given to means of legitimately mitigating future taxation including:
- Making use of own and family members’ tax allowances
- Using investment structures such as companies
- Planning for those moving to or leaving the UK.