Cryptocurrency has been one of the most hyped topics in the financial market amid the COVID pandemic. Just a few years back, crypto was all about Bitcoin, but now the digital currency market has evolved and revolutionized into something much bigger. With this change in the industry, investors need to keep up with the changes and updates regarding the changing rules and regulations neighboring cryptocurrencies and the corresponding tax treatments. 

HMRC wants a share of your cryptocurrency gains even if they've all disappeared by the time your tax is due. They have introduced various tax treatments surrounding crypto assets, over time, due to the evolving nature of the industry. Thus, investors need to know that any crypto transaction that locks in a gain, is treated as a disposal for capital gains tax purposes. 

What Are Crypto Assets?

Crypto assets are a type of digital asset that is an intangible, digital currency that uses a highly sophisticated type of encryption called cryptography to secure and verify transactions as well as to control the creation of new units of currency. 

Crypto assets are not considered as money or currency by HMRC, instead, they have grouped crypto assets into four main categories. These currencies are viewed as types of tokens which mainly include:

1. Exchange tokens: This type of token is used as a means of payment. The most well-known token is bitcoin which is an example of an exchange token.

2. Utility tokens: Utility tokens provide the holder with access to particular goods or services on a platform, usually using DLT.

3. Security tokens: These kinds of tokens have some particular rights or interests in a business, such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits.

4. Stablecoins: Stablecoins are crypto assets that are pegged to the value of fiat money or other assets.

Lately, HMRC has touched upon exchange tokens, the exchange token holds value and can be used as a source of exchange and investment for your business.

Who Has (has not) to Pay Tax on Crypto Assets? 

Your crypto portfolio just like your shares portfolio, if you make a profit, it will be liable for tax. 

Tax on Investment: If you are someone who holds crypto assets as a personal investment, you will be taxed on any profits made on these assets. You have to pay capital gains tax on overall gains above the annual exempt amount. 

Tax on Gain: You have to pay taxes for cryptocurrencies received from mining, airdrop, confirmation rewards, and crypto received as salary from an employer. 

Tax on Donation: If you donate the crypto assets to charity, you will not have to pay any capital gains tax unless the donation is more than the acquisition cost. 

Tax on Loss: According to HMRC, the capital losses from cryptocurrency can be considered for the tax liability. If you sell the crypto for loss, then the loss can be deducted to reduce the overall capital gain. Also, exchanges of crypto for fiat or crypto for another crypto are both taxable events.

Which Taxes Can Apply? 

The types of taxes will rely on who is engaged in the business and how they are carried out. These include:

• Corporation tax
• Capital gains tax.
• Income tax and National insurance contributions
• VAT
• Stamp Duty Taxes

Declaration of Tax to HMRC

After you are done calculating the amount of tax your business is liable to pay, you will have to declare the annual returns to HMRC through either:

• Self-assessment tax returns for particularly sole proprietors and partnerships, or
• Company tax returns for companies

This is where HMRC will consider your case and determine the correct tax treatment according to relevant laws.

Guidance for CGT on Cryptocurrency

You can find guidance published by HMRC for filing taxes on cryptocurrency in the UK. The difference between what your cryptocurrency costs you, and how much you sold it for is basically your capital gain.

In the UK there is an annual CGT exemption. It currently stands at £12,300 for the 2021-2022 year, and gains up to this amount are not subject to CGT.

Calculating CGT can be tricky, partly due to the “30-day rule”, which was introduced to prevent people from using up their CGT allowance each year by selling shares then buying them back the next day. To calculate any tax due: 

Work out your profit, and then subtract the annual allowance. Then add any remaining profits to your taxable income for the year. If you are still below £37,500, then CGT will be charged at 10%. Above that, it is charged at 20%.

Final Thoughts

The cryptocurrency was initially started as a non-regulatory currency, but with necessary safeguards and regulations, the UK government will restrict any fraudulent practices to ensure that your business is carried out in the safest means. Thus, it is important for you to stay updated and awake for new crypto asset taxation policies that may potentially affect your business.

To avoid complications regarding the tax calculation, simply contact your trust London Accountants and get done with your calculation. 

Contact Taj Accountants

Save time on the calculation of your taxation, instead contact your local Accountant in London to help you out. As your reliable Small Accountants in East London, we offer you a wide range of accounting and taxation advice to sole traders, limited companies, or partnerships. Our expert team of accountants aims to provide you the most suitable accounting and taxation solution in regards to HMRC regulations. Contact us for a comprehensive solution for your taxation at your convenience. 

DISCLAIMER: The purpose of the blog is to provide information and insight regarding the situation. The readers must contact experts before making any decisions based on the information. We highly appreciate you contacting Taj Accountants for further assistance.