Do you need to pay tax on cryptocurrency?

Nov 30, 2021 | Uncategorized

Cryptocurrencies have skyrocketed in popularity in the last ten years or so, and it doesn’t look like they’ll be disappearing anytime soon. 

More than 10,000 cryptocurrencies exist as of November 2021, and governments around the world have had to formulate their policy responses.

El Salvador became the first country to accept Bitcoin as legal tender in June 2021, and it recently announced plans to build a ‘Bitcoin city’ funded by the cryptocurrency.  

By contrast, China declared all cryptocurrency transactions illegal in September 2021, having already banned mining and intermediaries.

Here in the UK, it’s possible and legal to make money by buying and selling cryptocurrency – but consumers should be aware of the potential risks, as well as the tax that might be due.

The emergence of cryptocurrencies and cryptoassets

The origins of cryptocurrency go as far back as the 1980s, when American cryptographer David Chaum came up with ‘ecash’, an anonymous type of electronic money.

It wasn’t until the last decade, however, that things really took off. In 2009, ‘Satoshi Nakamoto’ created Bitcoin, the first decentralised cryptocurrency. To this day, the real identity of the person – or group of people – going by this pseudonym remains unknown.

The first transaction involving physical goods took place on 22 May 2010, in which 10,000 Bitcoins were exchanged for two Papa John’s pizzas.

Over the following years, rivals began to emerge, and the price of Bitcoin fluctuated. In 2011 it reached parity with the US dollar; by 2013 the value of a Bitcoin shot up from $150 in October to $1,242 by the end of November. It then dropped to $340 in 2014.

Around the same time, cryptocurrencies had attracted enough interest that the UK Treasury commissioned a study on their role in the economy. 

The final report for this was published in 2018, in which it said its “immediate priority” was to mitigate the risks posed by cryptoassets, such as the danger to consumers of investing in a volatile currency, as well as the potential for financial crime. 

It noted, however, that other applications of distributed ledger technology “have the potential to deliver significant benefits in both financial services and other sectors”.

Today, the price of a single Bitcoin stands at $66,974.77 – meaning if the person who’d received Bitcoins for pizza back in 2010 had held onto those coins, they would now be worth $669,747,700. 

How are cryptoassets taxed?

HMRC updated its internal manual with guidance on the way cryptoassets are taxed in March 2021, giving a helpful insight into the way its advisers interpret tax law in this area.

One important point this guidance makes clear is that, despite its name, cryptocurrency doesn’t count as currency or money in the eyes of HMRC. Although its value is volatile, buying and selling it is not classed as gambling – that means it’s not tax-free.

When working out the tax that might apply to cryptoassets, there is an important distinction to be made between personal and business use. Depending on which of these categories you fall under, the tax treatment might be different.

Generally speaking, HMRC is aware this is a fast-moving area, so it judges the facts of each case rather than setting out black-and-white rules.

What do you need to report?

If you’ve received or sold cryptocurrency, you should check whether you need to pay tax, and report it to HMRC.

When you sell, give away or exchange a cryptoasset, you might have capital gains tax to pay. If that’s the case, you’ll need to report it. This can be done through a self-assessment tax return or through HMRC’s capital gains tax real-time service.

If you’ve received tokens from mining you’ll also need to complete a self-assessment tax return, unless you’ve received:

  • cryptoassets worth less than £1,000
  • less than £2,500 from other untaxed income

There are some different rules to be aware of if your employer gives you the tokens. 

Cryptocurrency remains a notoriously complicated area, and it’s always best to get expert advice to make sure you’re reporting correctly, and you understand the potential tax charges.

At FMA, we use market-leading technology to help crypto investors calculate and report in this area. Get in touch to find out more.

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