23rd February 2022
Over the last few years, we have seen a rise in the use and distribution of Cryptoassets, it is with this in mind that it is important to have an understanding of the tax implications surrounding cryptoassets in line with HMRC. As HMRC do not see the trading and selling of these as gambling, cryptoassets are liable to tax and need to be declared on your tax return. To establish which tax applies, a distinction will need to be made between trading and capital appreciation.
Capital Gains Tax
Most cases where an individual holds cryptoassets as a personal investment are most commonly for capital appreciation and will be subject to capital gains tax when a disposal is made. Only gains that exceed the capital gains annual exemption will be subject tax, the capital gains annual exemption for the 2021/22 tax year is £12,300.
When crypto tokens are sold, exchanged, used to pay for goods/services or gifted to another individual (this excludes transfers to a spouse), then a disposal takes place. When cryptocurrencies are moved between wallets this is not classed as a disposal.
Any gain on disposal can be reduced by the amount in which they were bought for and any transaction fees incurred. However, if the transaction fees are paid in crypto tokens, then this would be classed as a separate disposal.
Income Tax
Where an individual receives cryptoassets from their employer as a form of payment then the income will be subject to income tax and National Insurance contributions.
Where a loss is made this may qualify for relief and be offset against other income or capital gains in the current or previous tax year.
There may also be cases where the individual is doing business running a financial trade in cryptoassets. The trading profits will be treated under Income tax rules over the capital gains tax rules.
Mining Crypto assets
Mining is the process when new Bitcoin is generated and verified. The tax treatment of mining depends very much on the frequency and regularity of the income derived from this. A single computer generating cryptoasset is likely to be treated under the capital gains tax rule due to the infrequency. However, on a larger scale this is likely to be treated under trading rules and taxed as income.
What records should be kept?
Cryptoasset exchanges may only keep records of transactions for a brief time, or it may not in existence when the taxpayer completes their tax return, due to this it is up to the taxpayer to keep records of any cryptoasset transactions whether subject to capital gains tax or Income tax. The information that should be kept as per HMRC guidance is as follows:
• The type of cryptoasset
• Date the transaction took place
• If the cryptoasset was bought or sold by the individual
• The quantity
• The monetary value of the transaction at the date in when it took place
• The total investment units held
• Bank statements/wallet addresses
If any of the above applies to you and you would like help or advice surrounding this, please feel free to contact us for further information on 01903 300230, or email info@thlacccountancy.co.uk.