Tax doesn’t have to be taxing, according to HMRC’s old slogan, and as long as you are aware of the rules it can apply to crypto investment, too.
Watching bitcoin, litecoin and other assets shoot up and down in value make crypto investing an exciting, and potentially profitable pastime. But, as with most things in life, if you make money, you are liable to pay some of it to the taxman.
To help you understand if you could owe tax, try eToro’s tax calculator – simply add your crypto trades, plus gains from other assets, and the calculator will work out if you could owe tax. You can also download the file to show to a tax advisor or tax professional.
Here, we will go through some of the main ways you may end up with a tax bill – but also how you can offset some of it, too. This is not an exhaustive list, but it intends to highlight some of the key points you need to consider.
We are all used to the feeling of working hard all week only to see the taxman take a chunk of our salary. With crypto investing, you may have to suffer the same.
While tapping a “buy” or “sell” button is not the same as pulling a 12-hour shift, in some cases, HMRC can class your actions as earning an income.
If the taxman suspects that your buying and selling activity constitutes “trading” he might hit you with a bill on the earnings you make.
However, trading, at least as far as financial markets are concerned, is a full-time career, so you would have to be making a significant number of transactions to pique the taxman’s interest.
So far, there are no published limits around what “trading” might entail, but it pays to be aware.
Mining can attract income tax as it can be perceived to be work. Despite it being the computer putting in the hours to carry out the complex calculations to place transitions on the blockchain, it is you the taxman sees as taking the gain.
So far, HMRC has not published the upper limit of tax-free mining, but if you have a basement full of whirring hard drives mining day and night, a knock on the door from the taxman might be something to consider.
Capital Gains tax
CGT is one of the facts of adult life that can seem a little unfair.
You buy a record at a car boot sale that turns out to be Elvis’s last ever recording – HMRC wants a slice of the profit. Someone gives you a twee little mantelpiece trinket that turns out to be a key relic from the Russian revolution – the taxman wants his share of what you sell it for in Moscow.
And so it is with crypto. If you sell an asset for a higher price than you paid for it, you might be liable for CGT. Despite that being the point of investing in any asset, HMRC wants a piece of the action.
The CGT rule applies whether you bought the tokens years ago when you overheard someone mention bitcoin on the bus, forgot, then sold at the peak in 2017 or even just buying on Monday and selling on Friday.
It also applies if someone gives you tokens as a gift or in exchange for something else.
But remember, it is not the process of receiving them that makes you liable, it’s the selling on for a profit HMRC cares about.
There is some good news, though.
As with all taxes, there are ways of offsetting your bill. With income tax, as with your everyday salary, expenses you outlaid to enable you to do the work can offset the liability.
You might not need work boots, a hard hat or an MBA to buy tokens, but there are certain items you could legitimately need to trade crypto and earn an income from it.
CGT also offers some handy offset opportunities that are worth exploring. For example, each year, you can earn £12,000 in these perceived windfalls before CGT kicks in. The amount is adjusted (usually up) annually, so stay up to date on that.
Additionally, you can claim back expenses against the tax liability for anything you needed to improve, upkeep or even buy and sell the asset that has made you the profit.
While in the world of physical assets, this might extend to warehousing of a classic car or renovating a house, in cryptoland this could mean paying for secure wallets or advertising for buyers/sellers of your tokens.
It is worth doing your research here, as it might be a way to avoid wiping out your profit, and you can offset your CGT back up to four years.
It’s up to you
There is one key thing to remember with all this – the responsibility for all of this is on you.
You have to declare to HMRC any gains, earnings and offsets – and you have to do it in a timely fashion. Just as you need to complete a tax return every year – or ask your employer to do it for you – so it is with crypto.
If the taxman comes calling (or more likely sends you a letter), ignorance is no defence. It is up to you to be informed.
And don’t think HMRC doesn’t know what you’re doing either. All brokers regulated by the UK’s Financial Conduct Authority report all trades made on their platform to HMRC on an annual basis.
Also, remember the taxman has wide-reaching powers to go into bank accounts and look at what we have all been doing… and he prefers being kept in the loop to having to find out for himself.
Finally, HMRC needs you to report what you owe in the UK’s official currency, rather than USD, which is what crypto is usually valued in. There are plenty of online calculators that can help you to do this, with data going back years so you can accurately see what you made (or lost).
It might all sound onerous, but that’s life sometimes. It is better to stay on the right side of the taxman – he might even become a friend.
Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading crypto assets is unregulated and therefore is not supervised by any EU regulatory framework. Your capital is at risk.
eToro does not represent any government entity. You should check with a tax professional or HMRC if you are paying the right amount of tax.
Applicable to UK taxpayers only.
Disclaimer The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of CoinGape. Do your market research before investing in cryptocurrencies. The author or publication does not hold any responsibility for your personal financial loss.