Cryptocurrencies: investor or trader ?

About two thirds of UK cryptocurrency investors have invested in Bitcoin and at different points in the ten-year history of cryptocurrency, Bitcoin has fluctuated significantly in value. Those who bought Bitcoin back in 2009 when it was worth fractions of a dollar could potentially have made hundreds of millions of dollars in profit in 2017 when its value peaked at almost $20,000, or in 2021 when it peaked at $65,000. Typical UK investors are men aged over 35 in professional or managerial jobs, holding an average of about £300 of cryptocurrency. That’s a relatively small investment, but it’s increasing each year (in 2020 the average was £260).

Cryptocurrencies: what are they and how to account for them?

Whilst cryptocurrency is a relatively new asset, the regulations surrounding it are still being formed. In the UK, you have to pay tax on profits or gains exceeding £12,300. And so irrespective of your view on the validity of cryptocurrency, you will always be liable to pay tax on your investment profits from them. As explained on government website GOV.uk: “HMRC does not consider cryptoassets to be currency or money. On its own, owning and using cryptoassets is not illegal in the UK and does not imply tax evasion or any other illegal activities.”

However, when it comes to taxing them, it depends on how the tokens are used. The HMRC guidance CRYPTO10100 – Introduction to cryptoassets: what are cryptoassets – states; “The tax treatment of all types of cryptocurrency depends on its nature and use – not its definition.”

Cryptocurrency Tax in UK

People buy cryptocurrencies either hoping their investment will grow over time or to make certain purchases. That’s why they’re required to pay Capital Gains Tax if they sell cryptocurrency tokens, exchange them, use them to pay for good or services, give them away or even donate them to charity. You can claim a CGT allowance and some allowable expenses are deductable. Additionally, in the case of a failed investment, you can apply for the post-layer loss relief. GOV.uk explains the cryptoasset records you must keep and how to report them.

If HMRC believes that you as individual taxpayer actually trade in cryptocurrencies rather than occasionally invest, you’ll be expected to pay Income Tax rather than Capital Gains Tax. There can also be implications relating to Stamp Duty, Inheritance Tax and pension contributions.

On other hand, we need to remember that also businesses other that individuals that generally speaking buy or sell cryptocurrency (tokens or a denomination of a cryptocurrency), exchange them for other assets (including other cryptoassets) or provide goods or services in return for tokens, are liable for Corporation Tax, Corporation Tax on Chargeable Gains, but also are liable for an appropriate calculation and payment of National Insurance contributions, Stamp Taxes and/or VAT.

The amount of tax the business must pay on cryptocurrency is determined by its turnover, costs, profits and gains. Obviously, these are declared each year to HMRC via Self Assessment for sole traders and Corporation Tax returns for limited companies.

If your cryptoassets are traded on exchanges that don’t use pounds sterling, the value of any gain or loss you make must be expressed in pounds sterling when completing your tax returns.

In our opinion the way how cryptoassets is taxed will continue to develop as a result of the ever-evolving nature of the technology used and the areas in which the exchange of cryptoasset may be applicable.

Please contact us if you require further advice on cryptoassets or any other tax related matters.