It’s time to dispel the myth that tax isn’t due on gains from cryptoassets. Over the last two decades, cryptocurrencies have become more popular, and now HMRC is targeting those who profit from them.
In March this year, HMRC released a ‘Cryptoassets Manual’ to clarify their position on cryptocurrencies.
While many people consider the purchase and sale of cryptocurrency more like gambling, it is really more akin to the purchase and sale of stock. In the UK and non-gambling gains must be declared and taxed, and this most definitely includes gains from all types of cryptoassets.
HMRC now has access to cryptoasset data, and if you fail to disclose your crypto gains in your self assessment tax return they will likely chase you up about it. If you have failed to disclose your crypto gains and have so far not received a letter, it is wise to proactively report this to HMRC. They look more favourably on those who come forward to correct a mistake than those who have to be chased down for one.
You may receive a ‘Nudge Letter’ from HMRC, similar to these nudge letters about foreign income, which will inform you that they are aware of undeclared gains. If you receive one of these letters do not ignore it, and do not hesitate to act on it. Those who come forward willingly will likely be treated the most leniently.
But Is It Capital Gains Tax or Income Tax?
This is where it does get a little tricky. HMRC can view your activity as ‘trading’ or ‘buying/selling’; trading will result in income tax being applied, and selling for profit will result in CGT being applied.
In general, for most individuals, the activity will be considered buying and selling of cryptocurrency. So in this case we’re talking about CGT. There is a £12,300 tax-free allowance which may help reduce the CGT owed depending on your individual circumstances, the remaining profit would be taxed at either 10% or 20% depending on your overall income level.
What If I Don’t Sell It?
There is another rumour going around that you only pay tax on the sale once the cryptocurrency is converted into conventional currency. This is not true either. If you sell one crypto currency, buy another and make a profit you will be taxed on that profit, similarly if you make a loss that can be used to reduce your capital gains position.
If you currently have a cryptoasset portfolio, or you’re thinking of starting one, you should speak to your accountant and consider your overall tax situation to best minimise your tax exposure.