UK Crypto investor? You probably owe tax.
There is no denying that the cryptocurrency space is an exciting one. Whether it’s Elon Musk’s tweets positively or negatively impacting values or businesses announcing that they now accept cryptocurrency for everything from coffee, clothes and even building work, it doesn’t seem like a day goes by that some news on crypto is splashed across the headlines.
One of the main draws of cryptocurrency is its independence of government-owned fiat currencies. Giving its users greater freedom of how they use, store and trade their wealth. Many also assume that this independence from the government also means that they do not need to pay taxes on cryptocurrency. This simply isn't true.
In this article, we discuss how HMRC sees cryptocurrency and whether you may owe tax.
How does HMRC see crypto?
Despite its name, HMRC doesn’t strictly see crypto as a currency. Instead, it breaks it down into different types of assets. These assets include:
This is what most of us think of when we hear the word 'cryptocurrency'. Exchange tokens can be used in place of cash to pay for goods or services. They are often also purchased and held as investments due to their potential to increase in value.
The best-known cryptocurrency, Bitcoin, is an example of an exchange token.
Some businesses or groups of businesses will use utility tokens to offer a secure way to access specific goods or services.
For example, a start-up that needs funding, but does not yet have a final product to sell, may issue utility tokens in exchange for investments. The start-up would issue those tokens on the understanding that they could be exchanged for goods or services in the future.
Utility tokens can also usually be traded with others, much the same as you can trade exchange tokens.
Security tokens are another type of cryptocurrency that can be used to raise funding for a business or other project. However, unlike utility tokens which are used to secure investment in return for future product and services, security tokens provide a stake in an asset such as a business, property or car.
Security tokens are a digital contract for a fraction of ownership of an asset that is preserved in the blockchain ledger.
Most cryptocurrencies such as Bitcoin can be incredibly volatile. Typically, their value depends on various factors ranging from media coverage to what Elon Musk decided to tweet that day.
On the other hand, stablecoins attempt to offer the benefits of cryptocurrency without a high level of volatility. They do this by pinning the value of the coin to something which is considered to have a stable value such as fiat currencies or gold.
Do I owe tax?
As, in most circumstances, HMRC view cryptocurrency as an asset income tax does not apply. Instead, you are more likely to owe capital gains tax when you dispose of your crypto assets.
For example, if you purchased a Bitcoin for £10,000, which rose in value allowing you to use it to purchase a car for £30,000 you would owe capital gains tax on the £20,000 increase in the value of the coin. This can be applied to any exchange, even if you were exchanging your cryptocurrency for other cryptocurrencies.
There are some cases where you will need to pay income tax on cryptocurrencies:
- When your employer gives you cryptocurrency as a non-cash payment
- When you receive cryptocurrency from mining, transaction confirmation or airdrops
If you are dealing with cryptocurrency as a business, different rules apply.
Can I protect my crypto from tax?
It is difficult to protect your crypto gains from tax.
However, each person receives a tax-free allowance for capital gains each year. What your tax-free allowance is depends on the rate of tax you pay. If you are being charged income tax on your cryptocurrency, each person also receives an allowance for tax-free income.
Unfortunately, you are currently unable to hold cryptocurrency directly in tax-free wrappers such as ISAs or SIPPs. This means it is difficult to legally protect your capital gains from tax. However, you can gain some exposure to cryptocurrencies through these wrappers by investing in managed funds that have purchased cryptocurrency and hold those funds within an ISA or SIPP.
Tax on cryptocurrency
Governments are still working out the best way to tax cryptocurrencies. As this type of currency is used more widely for everything from holding value to purchasing groceries, we are likely to see developments in how it is taxed.
For now, it is important to be aware of the tax implications of this asset, as it will help you understand the true value of your investments.
For more information, download our free guide to Capital Gains Tax.