As the world of cryptocurrencies is gaining in notoriety, more and more people are looking to get their feet wet in crypto trading or investing. But whether you are just dipping in your toe or have already jumped in and made some gains, there’s a common question that keeps popping up: Do I pay tax on Crypto Trades in the UK?
In short, yes, you do need to report any taxable gains resulting from crypto trades to HMRC in the UK.
It is, in fact, a global point of confusion, as different jurisdictions grapple with the logistics of how to deal with this growing, alternative economy.
The confusion perhaps stems from how paying taxes are ingrained into the human psyche. We associate taxes with central, government authorities. However, cryptocurrencies run on a Blockchain network, void of any central, governing authority like banks and regulators.
As such, many of us might assume that, because crypto trades bypass these traditional, central authorities, you are not liable to pay tax on any gains that you make.
In the UK at least, this is not the case.
HMRC’s stance on cryptocurrencies
In an effort to clarify their stance on Bitcoin and cryptocurrency trading, HMRC released a policy paper in 2014 called Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies.
In it, they make their position clear in no uncertain terms:
Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for CGT if they accrue to an individual or, for CT on chargeable gains if they accrue to a company.
There is no ambiguity in this sentence: all Bitcoin and cryptocurrency traders or investors that fall under the jurisdiction and scope of HMRC will have to pay tax on any gains that they make as a result of such trades.
HMRC have not released any tax legislation that addresses cryptocurrencies specifically, mainly because they understand that Bitcoin and other cryptocurrencies have a unique identity and that no direct comparison can be drawn to traditional forms of investment and trading.
Another reason is that, according to the governing tax body, cryptocurrency trading, and the resulting tax implications thereof, are already addressed in existing tax law.
How much tax do you have to pay?
How much tax you have to pay will depend on the type cryptocurrency transaction you are undertaking.
The policy paper looks at four different types of tax, including VAT, Corporation Tax (CT), Income Tax (IT) and Capital Gains Tax (CGT).
Cryptocurrency transactions either fall outside of current VAT rules or are exempt, while CT mainly comes into play when there are profits or losses on exchange movements between currencies (i.e. Bitcoin and fiat). This would ordinarily be reflected in company accounts anyway and therefore taxed under normal CT rules.
The overwhelming majority of Bitcoin users, as traders or investors, will be taxed according to IT and CGT rules, with CGT specifically being applicable to most everyday users.
It is important to make a distinction between a cryptocurrency trader and investor in order to determine which tax policy is applicable.
If you are involved in Bitcoin mining, for example, this is considered trading and any gains (or profit) will be treated under Income Tax rules.
If however, you are investing in Bitcoin and other cryptocurrencies, any gains you make on selling these digital tokens will be treated under CGT rules.
Also, trading one cryptocurrency for another (say Bitcoin for Ethereum) is not exempt, you could still be liable for any gains made on the transaction, even though the gain was not actually made in a traditionally accepted currency (like GBP, EUR or USD).
Capital Gains Tax: cryptocurrency as an asset
As the popularity of cryptocurrencies took off in the last couple of years, HMRC released an update to their Capital Gains Manual to include the use of cryptocurrencies.
The majority of the document consists of certain CGT rules and specific parts of legislation, which doesn’t make for very interesting reading.
Saying that, they do acknowledge that each case will be considered on its own individual circumstances to determine whether any gain or loss is allowable.
Why is this important?
For instance, depending on the facts, certain transactions can be deemed too speculative to be taxable. In this instance, it would more closely resemble gambling or betting.
Capital Gains Tax, in its simplest form, is charged on the difference between the cost price of an asset (in this case Bitcoin or any other cryptocurrency) and the selling price.
Now, this might seem simple enough if you’ve only ever made a single purchase. But what if you’ve made multiple investments over a period of time? Even multiple investments of the same currency?
Because of the volatility in the market, you are likely to have a pool of one currency which will now have the same selling price but bought at different prices. How do you determine the cost price of the units that you sell out of the combined pool?
If you’ve managed to accurately determine the cost price, the next step is to calculate the actual tax liability.
As we explained, the difference between the cost price and the selling price is the basis for CGT in its most rudimentary form. Tax rules are rarely that straightforward though and it can get a lot more complicated than that, considering you have to take into account personal allowances, allowable losses and the rate of tax that is applicable to you personally (i.e. basic, higher or additional rate).
It can be overwhelming, to say the least.
How can you make sure you pay the correct amount of tax?
As it stands, the responsibility of calculating and reporting any gains or losses falls squarely on the shoulders of individual users.
However, like we’ve seen in America, there might come a time where HMRC demands customer details (including all account activity) directly from cryptocurrency exchanges.
So how can you ensure you calculate your cryptocurrency tax liability accurately?
The good news is that there are professional services, like Crypto Tax Helper, that will make the process less daunting.
The aim is to make it easier for people to report their Crypto gains and losses by letting them input their trade history from various exchanges and then outputting a comprehensive report for HMRC.
As a result, you will be able to rest easy knowing that, not only are you complying with current tax regulations (and therefore won’t get slapped with the unwelcome surprise of a hefty tax bill in the future), but also that you are not paying more tax than what you actually should.