Cryptocurrency accounting is a relatively new area for many people. There has been a long held belief that crypto assets aren’t subject to tax, which has always been incorrect, but now HMRC are setting out guidelines for dealing with gains and losses resulting from the ownership, sale, purchase and trading of digital assets.
Cryptoassets should be considered when looking at your overall personal tax position, and various types of tax could be applicable in very specific situations. This means that cryptocurrency accounting is not always simple and straightforward.
Our experienced cryptoasset accounting team are available to help guide you through the complex world of crypto accounting, helping to ensure you are operating in a tax efficient and compliant manner.
HMRC are planning to maintain their focus on cryptoassets for the foreseeable future, so now is the ideal time to make sure you are up to date with legislation, that you are paying the correct type and amount of tax, and that your digital portfolio is working in a beneficial way for you.
Book a free consultation with one of our chartered accountants to see how we could help you.
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at Warr & Co Chartered Accountants
Crypto Tax Advisors
The world of tax is complex, the world of crypto tax even more so. Especially for those who haven’t really touched upon tax for cryptoassets – it can be extremely daunting! We understand, and we’re ready to help answer all of your questions.
Here are a selection of our frequently asked crypto taxation questions and answers:
Yes, crypto assets are subject to taxation in a variety of ways, and whether you owe tax on them will depend on your circumstances.
If you have calculated your total annual gains and your total is below the annual exemption, and if your proceeds on capital disposals do not exceed 4x the annual exemption then you don’t need to report your gains. However if you make a loss you may wish to report it, as this loss can be carried forward to minimise gains in later years.
For most individuals who buy, sell and trade crypto assets – like cryptocurrencies – Capital Gains Tax will apply. There is currently an annual exemption of £12,300 per tax year, and so many individuals may not owe CGT on their crypto profits. However, the CGT threshold applies to any and all profits so you do need to be wary of your own tax-year profits and how your digital currency profits factor into that equation. For example, if you made a profit on shares, the sale of property or any other personal investment, these must all be added together and still be below that threshold, otherwise CGT will be due.
It is less usual for cryptoassets to be subject to Income Tax and National Insurance, but it does happen and it’s not always completely clear which tax may apply. If you receive crypto assets as payment from an employer, or if you trade crypto assets HMRC may see this as a normal income stream, at which point Income Tax and NI may apply too.
It isn’t always clear which tax you will owe regarding your crypto portfolio. It very much depends on your activities. For most, cryptocurrency is seen as an investment and is not bought/sold/traded frequently – in these cases CGT will usually apply, but if HMRC decides that your cypto activity amounts to a business then Income Tax and NI may apply.
But it is important to remember, Tax may be applicable to any and all crypto asset activity – it depends on your overall tax situation and we cannot give you a guaranteed ‘yes’ or ‘no’ without first taking a look at various different aspects of your crypto activity, portfolio, income and gains.
Firstly, yes if you buy/sell/trade in any cryptocurrency or crypto assets you should be fining a Self Assessment Tax Return. That is the simple part. When it comes to completing your Tax Return, however, things can get pretty tricky pretty quickly.
Since crypto assets are not recorded in Pound Sterling, and even worse each type has its own currency rate, you need to do your best to convert your holdings into Pound Sterling for the purposes of your Tax Return. And if you have traded one type of crypto asset for another, you also need to work out the exchange rate and convert that to Pound Sterling.
As this can all become quite confusing, it is best to either consult your accountant or engage your accountant to complete your Self Assessment Tax Return on your behalf.
Self Assessment Tax Return Service
We offer a Self Assessment service, so if you feel your Tax Return is getting too complex or too time consuming, our team of accountants could complete this for you every year.
Learn more about our Self Assessment Tax Return service here.
HMRC now has access to crypto data from various cryptoasset exchanges worldwide, using its rights under International Treaties rules. Aa such, at the start of 2022 HMRC sent out ‘Nudge Letters’ to Taxpayers they believe may have undeclared gains from crypto assets. As more data is gathered we expect to see more ‘Nudge Letters’ going out.
We all understand that crypto currency and crypto asset taxation is a new and often confusing area, but if you come forward and disclose your gains following the receipt of a nudge letter, that will always be considered more favourably than if they have to chase you for tax owed. If you may have failed to disclose your crypto gains and have so far not received a letter, it is wise to proactively report this to HMRC too.
Your first step should be to consult your accountant, who can give you a good idea of the best way forward either following the receipt of a Nudge Letter or in advance of one if you think you owe tax on crypto gains.
Did You Know?
Out of the estimated 1.2 million Taxpayers in the UK who hold some sort of crypto asset, that only 8,329 of them received a Nudge Letter in 2022?*
Does this mean that only 0.3% of those with crypto assets are liable for tax? Or are HMRC only just getting started? While those with assets totalling up to £1000 are neither big-fish, nor likely to be exceeding the CGT threshold (from crypto assets, anyway), it seems that the majority of these individuals will not be chased by HMRC.
However, it is always best to be transparent with HMRC and of course it is always necessary to pay any tax owed. So if you haven’t received a ‘Nudge Letter’ but you believe you may owe tax – act now and avoid a fine or even an investigation.
*accurate at time of writing (May 2022)
HMRC has access to unprecedented amounts of data regarding crypto assets. So far we have seen indications that they have requested data going back to 2017 – and it is likely they will dig back even further.
Originally when cryptocurrencies like Bitcoin emerged, it was assumed by some that tax didn’t apply. However this has always been incorrect, just barely enforced.
We have seen HMRC go after historical tax discrepancies before. So it is likely that any and all historical gains from crypto activities will be demanded eventually. So if you believe you have undeclared profits or income from your crypto portfolio it’s time to dig up the data and come forward – proactivity is always preferential when it comes to HMRC and any tax owed.
Our team of cryptoasset accountants will assist you in this process, and help you declare your information to HMRC’s voluntary disclosure facility.
Typically HMRC will investigate up to 6 years of historical tax errors, however they have been known to go back 20+ years!
The short answer is ‘yes!’, the longer answer is ‘well yes, maybe’. Never assume your crypto activities are not liable for any sort of tax.
The truth is that if you are trading assets, HMRC may see your activities as a business, and therefor Income Tax and NI will be applicable. There is no hard and fast rule to tell you at what point your trading of crypto assets moves from non-business-like to business-like, that’s why it’s best to consult a specialist accountant who can help you figure out if your activities amount to a business in the eyes of HMRC.
Income Tax and NI will take priority over CGT (which becomes applicable on the occasional profits of selling your assets) – so if you’re regularly selling and making profits you are trading crypto assets in a more business-like manor.
Crypto assets are classed as ‘property’ when it comes to inheritance, and so they are liable for Inheritance Tax. So all crypto assets should be considered in Estate Planning.
If you have a crypto portfolio which is small and primarily for investment purposes you are unlikely to need to consider tax as much as someone who either has a large portfolio or someone who carried out a lot of crypto activities.
Either way, the safest option is to consult our experienced cryptoasset accountants who will let you know if you need to take action.