In a significant new development for SME businesses, all the major/popular Cryptocurrency exchange platforms have agreed to inform HMRC of any Cryptocurrency transactions that exceed £5,000?
HMRC currently consider cryptocurrencies to be a form of property, rather than currency (hence HMRC refer to them as Cryptoassets). This means that gains or losses from cryptocurrency transactions are normally subject to CGT, rather than income tax.
Examples of Cryptocurrency include: Bitcoin, Litecoin, Ethereum Exchange tokens and Stablecoins plus many more…
However, there are a number of complexities with crypto that you need to be aware of:
- If you are mining cryptocurrencies, the value of the coins mined is considered to be trading income for tax purposes and therefore, subject to income tax.
- If you receive cryptocurrency as payment for goods or services (e.g., airdrop), the value of the cryptocurrency received at the time of the transaction is subject to income tax.
- If you are exchanging one type of cryptocurrency for another (e.g., Ethereum for Bitcoin) then this transaction is considered a disposal for CGT purposes and will be subject to CGT.
Please remember, it’s important to keep accurate records of all cryptocurrency transactions, including the dates and prices at which they were made. This will make it easier to calculate your CGT liability when it comes time to file your tax return and could help to avoid any disputes with HMRC.
For the 2024/25 tax year onwards there will be changes to the self-assessment tax return forms, requiring amounts in respect of cryptoassets to be identified separately in the Income Tax and CGT sections of the return.
A common misconception with crypto is that people think a tax liability only arises when a cryptocurrency is converted back into money (fiat currency). Any token-to-token transaction that occurs creates a gain or a loss when converting the token and that action is subject to tax. E.g., changing Bitcoin to Ethereum, as far as HMRC are concerned, that is a disposal of an asset and acquisition of a new asset for CGT purposes.
It is estimated that 10% of UK adults hold or have held cryptoassets, which may appear surprising to those who consider crypto and digital assets to be a bit of a short-term fad. However, cryptocurrencies in one form or another are here to stay. This is further supported by companies like PayPal, Google and Microsoft etc. backing projects in the crypto universe.
If any further proof was required that Crypto is here to stay, then it comes from HMRC as Crypto now has its own Tax Manual – CRYPTO20000.
HMRC internal manual – Cryptoassets manual
In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets.
Individuals will be liable to pay Income Tax and National Insurance contributions on cryptoassets which they receive from:
- Their employer as a form of non-cash payment (see CRYPTO21100)
- Mining, transaction confirmation or airdrops (see CRYPTO21150, CRYPTO21200 and CRYPTO21250)
Cryptoasset exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual completes a tax return. The onus is therefore on the individual to keep their own records for each cryptoasset transaction, and these must include:
- The type of cryptoasset
- Date of the transaction
- If they were bought or sold
- Number of units involved
- Value of the transaction in pound sterling (as at the date of the transaction)
- Cumulative total of the investment units held
- Bank statements and wallet addresses, in case these are needed for an enquiry or review
In reality, this is the same type of information that you would keep in relation to any Capital (Gains) transactions. E.g., acquiring and disposing of shares, rental properties.
Over the past few years HMRC have been collecting data on crypto transactions (worldwide) and are now looking to start enquiring into individuals and companies who have not been declaring their crypto income and/or gains.
On 29/11/2023 HMRC opened their Crypto income and gains voluntary disclosure (same basis as their Let Property Campaign disclosure for those who did not declare their rental income).
HMRC normally only open these voluntary disclosures shortly before they issue large numbers of enquiries, so it may be time to consider what crypto transactions have been taking place over the past few years before HMRC get round to asking.
Scott Whitmore is Dafferns’ Senior Corporate Tax manager and is happy to assist should you have any concerns with your tax affairs.