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Taxation on Cryptocurrencies UK: Complete Guide

Taxation on Cryptocurrencies UK: Complete Guide
The Siliconreview
07 May, 2020

As much as cryptocurrencies are revolutionizing the fintech industry, there has been so much fuss on what exactly they are. Are they Securities? Commodities? Or simply, currencies? For that, the perpetual debates of whether crypto-assets should be taxed or not is quite intense in the crypto space.

In that rationale, there is a lot of confusion regarding cryptocurrency and taxes. While most crypto users are against taxation, most projects are turning out to comply with the set crypto tax measures that have started taking root in different countries worldwide.

A recent survey conducted by Childly, South Korean wallet provider, established that most crypto users support the idea of taxation. The poll, held across the globe involving more than 5,750 crypto users, determined that only one-in-five crypto users are against crypto taxation. 48% of the respondents strongly agreed with crypto taxation, while only 11% opposed the idea. 9% stated that it was too early to start taxing crypto assets.

Cryptocurrency taxation varies widely across the globe. The UK and the US are among the few countries that have formulated clear guidelines regarding crypto taxation.

As the title suggests, this article will look into cryptocurrency taxation in the UK. Here you will find all the screws and nuts of everything that has been going on in the UK regarding the country’s efforts to tax cryptocurrencies. In this article, you will get to know how to pay taxes on cryptocurrencies, how much fees are charged, steps in paying crypto taxes, and all the vital details there is to know.

UK’s Guidance on Crypto Taxation     

The UK tax body, Her Majesty Revenue & Customs(HMRC), published a guide for companies and businesses on 1st November 2019 concerning how digital assets will be taxed. The body also defined crypto-assets as “cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically”. The authority ruled out crypto-assets as forms of currency or money per the Cryptoasset Taskforce report.

HMRC identifies three types of crypto-assets: exchange tokens, utility tokens, and security tokens. The tax authority makes it clear that the tax treatment of all types of tokens is dependent on the nature and use of the token rather than the definition of the token.

Which Taxes Apply?

With over 2000 coins in the crypto space, the HMRC is yet to provide clear guidelines on taxing each currency. In 2014, the UK government released HM Revenue and Customs Brief 9 for Bitcoin only and hadn’t updated the brief to cover other currencies. Nonetheless, there are several taxes which apply as below:

Income Tax

HMRC taxes crypto-assets depending on how the person holding it uses it. For instance, if the holder is using crypto-assets for trade, their trading profits will be subjected to Income Tax. If the activity is considered to be crypto trading, HMRC will consider it as a business; thus, Income Tax rather than Capital Gains Tax will apply to profits.

Regarding crypto mining, if the mining does not amount to a trade, the pound sterling value of any crypto-assets awarded for successful mining will be taxable as income under the category of miscellaneous income.

Fees or rewards received in return for mining (for transaction confirmation) are also chargeable to Income Tax either as trading or miscellaneous income. Airdropped crypto-assets are also subject to Income Tax either as miscellaneous income or receipts of an existing trade.

Capital Gains Tax

HMRC considers the buying and selling of crypto-assets by an individual to be an investment activity. Individuals engaging in such activity are, therefore, required to pay Capital Gains Tax on any gains they generate. Capital gains are charged on crypto-assets if they both have a value that can be released and are capable of being owned. The selling of crypto-assets is, therefore, subject to Capital Gains Tax. Capital Gains Tax on crypto-assets is, however, not applicable when donating crypto-assets to charity.

Taxable and Non-Taxable Events

HMRC is quite evident in outlining a taxable event for cryptocurrency. You need to report any taxable event that triggers a capital gain or capital loss on your tax return. Below are taxable events for cryptocurrency in the UK:

  • Sale of cryptocurrency for fiat currency such as pound sterling
  • Exchange of cryptocurrency for another cryptocurrency
  • Earning cryptocurrency as income
  • Using cryptocurrency for goods and services

Non-taxable events include:

  • Giving cryptocurrency as a gift or donation to charity
  • Buying cryptocurrency using fiat currency, i.e., sterling pound
  • Cryptocurrency transfer- between exchanges or wallets

Steps in Paying Taxes

The capital gains tax to be paid is dependent on your income tax bracket and the marginal tax rate. It’s important to note that you’re not required to pay capital gains tax if your profits are lower than £11,700. To determine the amount of capital gains tax to be paid, proceed as follows:

Step 1: Determine Your Cost Basis

The first step in filing your capital gains tax is to determine the cost basis of your holding. Cost basis is the total amount you used to purchase the cryptocurrency. Other costs, such as transaction fees and brokerage commissions, are also factored in. The cost basis is then calculated as:

Cost Basis= (Purchase Price of Crypto + Other fees) / Quantity of Holding

Step 2: Subtract Cost Basis from Fair Market Value

The second step is to subtract your cost basis from the sale price of your cryptocurrency. The sale price is also referred to as the Fair Market Value. Capital gain or loss is then calculated as:

Capital Gain/Loss= Fair Market Value- Cost Basis

The capital gain/loss is what you owe the government in taxes.

Capital Gains Tax can also be calculated using share pooling. Share pooling, unlike conventional accounting methods such as LIFO and FIFO, involves using the average cost of all current assets to establish the value of the assets being sold. Taxation rules such as same-day rule and the 30-day “bed and breakfasting rule also apply in calculating Capital Gains Tax.

How and When Do I Need to File My Crypto Tax Returns in the UK

The tax assessment year in the UK commences from 6th April and ends on 5th April the following year. Electronics tax returns are due by 31st January the next year, while paper returns are due by 31st October the same year.

To file crypto tax for income and capital gains, you should use the SA100. You should list all cryptocurrency trades and sales onto the form plus the date you acquired the crypto, the date of sell or trade, Fair Market Value, cost basis, and your gain or loss. After listing all trades, find the total and file your tax returns. Find help filling crypto returns here.

Keeping Records of Your Transactions

HMRG calls for crypto holders to keep a detailed record of their crypto transactions. These records will help in finding out the value of the crypto at the time of filing returns. It’s important to note that crypto exchanges don’t always provide an accurate record of transactions. Thus it’s necessary to keep an accurate personal log of the trades. There are several tools such as Cointracking, Lukka, BitcoinTaxes that can help you maintain a precise record of your transactions. 

The Bottom Line

Taxing cryptocurrency is necessary to develop a standard crypto landscape and enhance mainstream crypto adoption. Agora Desk co-founder Alex notes that: “Cryptocurrency taxation is long overdue. The premise of taking crypto-assets will, in the long run, create confidence in institutional investors who are instrumental in Mainstream crypto adoption. It’s therefore essential for countries to develop clear guidelines regarding crypto-assets taxation and resolve ambiguities around crypto taxes”. In the UK, crypto-assets tax guidelines are unambiguous, and other countries should follow suit. 

About the Author

Kevin Wilson, Blockchain enthusiast and passionate crypto trader. Determined to make the complexity of the Crypto markets seem simple for ordinary folk.