The Crypto space is growing at a rapid rate and whether you believe this is the next generation of technology or you think it is a ‘bubble’, you have more than likely heard of cryptocurrency, Bitcoin & NFT’s.
But What Does It All Mean? And Are There Tax Consequences You Should Be Aware Of?
In this article we will look to provide an explanation of the tax implications that may arise for those involved with Cryptoassets. Furthermore, we have included an appendix summarising the commonly used terminology which we hope will be a helpful decipher for this article and indeed future conversations concerning Cryptoassets.
Having advised and supported a number of clients with Cryptoassets, we have seen first-hand that the tax rules are not hugely clear and indeed are being adapted at a fast pace to try and keep up with the fast-moving nature of the Cryptoasset space. Our role as advisors is to support our Crypto based clients by ensuring their affairs are arranged in a tax efficient manner and importantly ensuring they remain compliant. Understanding one’s tax and filing obligations is paramount.
The purpose of this article is to set out some fundamental principles, not least when one is subject to pay income tax instead of capital gains tax. HM Revenue and Customs outline the 9 badges of trade which will be considered when determining if an activity is treated as ‘trading’ and therefore subject to Income Tax. It is not necessary for all of these badges to be present when assessing if an individual is actively trading.
In contrast, those who hold investments passively for the long term in the hope they will increase in value will be subject to capital gains tax upon eventually sale of such assets. The following sections help to draw out the common instances of when a client is trading and subject to Income tax (and the associated rates), and when Capital Gains Taxes apply instead.
Income Tax
Transactions That Are Likely to Give Rise To An Income Tax implication:
- Receiving remuneration in the form of Cryptoassets i.e., Bitcoin
- Mining of Cryptoassets i.e., Bitcoin, Ethereum
- Earning Cryptoassets through loaning, staking.
Income Tax Rates
- £12,570 personal allowance at 0% – unless income received during the tax year is in excess of £100,000, in which case this allowance is tapered away by £1 for every £2 over the £100,000. For taxable income exceeding £125,140 the personal allowance will be reduced to nil. (2022/23 Tax year).
- Basic rate £12,571 to £50,270 at 20%
- Higher rate £50,271 to £150,000 at 40%
- Additional rate £150,000+ at 45%
Capital Gains Tax (CGT)
Transactions That Are Likely To Give Rise To A Capital Gain Tax Implication:
- Selling Cryptoassets for fiat currency
- exchanging one Cryptoasset for another Cryptoasset
- Spending Cryptoassets to purchase items or a service
- Gifting of Cryptoassets
Capital Gains Tax Rates
CGT annual exemption of £12,300 (2022/23) – Any gain up to or within this value will not be subject to capital gains tax. Gains that exceed the annual exemption will be liable to tax at the following rates:
- 10% rate between £12,571 and £50,270 – on the basis that the individual has no other taxable income during the relevant tax year.
- 20% rate for amounts in excess of £50,270.
HM Revenue and Customs position on Cryptoassets
HMRC have produced a Cryptoassets manual to provide ‘guidance’ on the tax treatment for individuals and businesses, whilst also outlining the current approach to the Decentralised Finance protocols:
When do you need to report your cryptoasset transactions to HMRC?
The UK’s financial year runs from April 6th one year to April 5th the next. So, for example, the 2022 financial year which you’ll be reporting on is from April 6th, 2021 to April 5th, 2022. You need to report your income and capital gains including cryptoassets by 31st January 2023 through your Self-Assessment Tax Return.
Make sure you keep an up-to-date record of your cryptoasset transactions throughout each tax year, to ensure that all relevant and necessary details are submitted to HM Revenue and Customs.
What you will need to accurately calculate your Cryptoasset Tax Liability
For the financial year you’re reporting on, you will need to access all of your
cryptoasset transactions, which may have occurred on numerous different exchanges and between multiple digital wallet addresses.
How Menzies can assist you with your Cryptoasset reporting requirements?
- Detailed tax report to accompany an individual’s UK Tax return
- Review and analysis of the tax treatment for each transaction
- Tax planning advice, including the timing of disposals, and maximising the available exemptions
Terminology Decipher
Click a term to learn more.
Where projects send free tokens to their community members, usually as part of their marketing initiative.
- Income Tax: if received as part of an individual’s trading activities which involve cryptoassets, such as mining.
- Capital Gains Tax: Coins received from an Airdrop will be subject to CGT when you sell, swap, gift or spend them.
A cryptoasset that is less well known compared to main coins such as Bitcoin, Ethereum or XRP.
A digital currency created in 2009 by Satoshi Nakamoto in response to the financial crash in 2008. Bitcoin is viewed and treated as an asset similar to property, stocks, or shares.
Individual units of currency that exist within a cryptocurrency.
This is a digital currency that uses cryptography to generate ‘tokens’ and verify the transfer of these tokens between people. Cryptocurrencies are completely decentralised and operate without a central authority, like a bank.
This is the storage of cryptoassets offline, which provides an additional security step to protect your holdings.
This is a ledger that is held by everyone on the network and records the movement of each token on the network. It is publicly assessable and unchangeable.
This is where financial activities and arrangements take place without the involvement of a centralised organisation, such as a bank or government.
- The tax consequences vary dependant on the type of DeFi platform used, such that income tax, capital gains tax or a combination of both may arise. HMRC have recently released guidance on the taxation of DeFi.
This is the term used for the marketplace where individuals can buy and sell cryptoassets using either fiat currency or alternative cryptoassets.
This is the traditional, centralised currencies such as pound sterling or US Dollars.
This is an update to the protocol/blockchain, there is no split, and the same chain carries on.
- There are no tax consequences in the event of a soft fork.
When developers of a cryptocurrency disagree on part of the development and so decide to split from each other, creating two separate cryptocurrencies i.e., Bitcash.
- Income tax: No implications.
- Capital gains tax: Coins received from a hard fork will be subject to CGT when you sell, swap, gift or spend them.
The process through which new tokens of cryptocurrencies are created. In turn, miners are rewarded with cryptocurrency for each new token they create.
- Income Tax: Taxable upon value of Crypto deposited into the miners wallet during the tax year.
- Capital Gains Tax: Coins received from mining will be subject to CGT when you sell, swap, gift or spend them.
is a unique digital asset stored on a blockchain ledger that cannot be replicated elsewhere. The most common form of NFT is that of digital artwork, which create value by their rarity and collectability.
Income Tax:
- If you are a creator of an NFT, you will pay income tax on the profits received when you sell an NFT.
Capital Gains Tax:
- is chargeable on the following events in respect of NFT’s;
- When purchasing an NFT using cryptoassets
- When selling/swapping an NFT for another NFT
- When selling an NFT for cryptoassets
Cryptographically generated characters that are mathematically related to a public address. They allow individuals to access their cryptoassets. The private key should be kept safe, since where the private key is lost individuals cannot access their cryptoassets.
Cryptographically generated characters that allow individuals to send and receive cryptoassets. They are mathematically related to private keys and when used together they allow individuals to access their funds.
A cryptoasset with lower levels of volatility, which are regularly pegged to existing fiat currencies, other cryptoassets, or exchange-backed commodities.
The activity of pledging your crypto coins to a protocol, which supports the blockchain network and also provides confirmation of transactions.
Income Tax:
- If a return amount or percentage is agreed upon transaction, then returns are likely to be subject to income tax.
Capital Gains Tax:
- where the proceeds to be received are unknown at the date of transaction it is probable it will be subject to CGT. This will be on the initial disposal to the protocol and on the disposal of any returns received from the transaction.
Is the unit of value held on the blockchain, it is representative of a tradeable asset. Tokens can be used for trading and storing value.
As cryptoassets are decentralised, each transaction must be verified by a third party on the network. This means that each transaction comes with a fee as a reward for the third party that verifies the transaction.
- Income tax: No tax implications
- Capital gains tax: In most cases transactions fees will be treated as an allowable deduction when calculating an individual’s capital gain, however there are instances where certain fees are not deductible.
A cryptoasset wallet allows an individual to access their cryptoassets, as well as allowing them to send and receive cryptoassets. There are ‘Hot’ wallets, which are connected to the internet, allowing the holder to easily access their funds. A ‘Cold’ wallet stores the information offline, unconnected to the internet.
Is the activity of staking or lending cryptoassets to in turn provide a return in the form of additional cryptoassets.
Income Tax:
- if you are earning income through yield farming then it will be subject to income tax.
Capital Gains Tax:
- If you are making gains through yield farming then these will be subject to CGT.
This is a pool of Cryptoassets that are held within a smart contract, these can be used as a loan arrangement between individuals without the need to use organisations such as a bank (which is a centralised authority).