There is currently widespread uncertainty about the tax treatment of cryptocurrency investments and trading activity.
If you have sold, gifted or spent cryptocurrency within the tax year, you may need to declare any profit or gains on your self-assessment tax return.
If you do not declare taxable income or gains, you may be liable to interest and penalties.
How much tax will I need to pay on my cryptocurrency?
Profits made on cryptocurrencies by individuals is generally subject to capital gains tax at a rate of up to 20% after deducting the annual allowance (£12,300 for the 2020/21 tax year). Where you have bought and sold cryptocurrencies through a UK company, any taxable profits will be subject to corporation tax at a rate of 19%. If you have regularly bought and sold cryptocurrencies, HMRC may say that you are liable to income tax at a rate of up to 45%. Most exchanges will keep a record of your transactions and let you download your history.
If I gift my cryptocurrency, am I liable to tax?
Under existing capital gains tax rules, if you gift your cryptocurrency or use it to buy other capital assets (including exchanging one cryptocurrency for another), you will have to pay tax on any increase in the value of your cryptocurrency between the date you acquired it and the date of the gift or purchase (subject to any available reliefs or allowances). Similar rules apply if you are subject to corporation tax or income tax on your profits.
How will HMRC know about my profits?
HMRC has significant powers to acquire and analyse information on UK taxpayers. If HMRC raises an enquiry into your tax returns, it is likely to question the appearance of profits in your bank account that have not been accounted for. The UK and EU are also currently consulting on new regulations that may require trading platforms to report information on certain account holders to the relevant national authorities.
What if I have made a loss?
If you have made a loss, you may be able to offset these losses against your cryptocurrency profits or other capital/trading profits. If you have bought and sold cryptocurrencies through a UK company and the company has made a loss on any individual transactions, loss relief may be available under the corporation tax loss relief rules. As mentioned above, many exchanges will keep a record of your transactions and let you download your history. It is essential to keep these records on file so that you can claim relief for any losses that you make.
What if I fail to declare any taxable profits?
HMRC has up to 20 years following the end of the relevant tax year to enquire into your tax returns. If you deliberately fail to declare taxable income or gains and tax has been underpaid, you may be liable to interest and penalties of up to 100% of the amount of tax due. In the most serious circ*mstances, criminal liability may apply.
Where can I get advice?
A qualified professional can provide advice and help you to make the necessary disclosures on your tax return.
Helen Cox is Managing Associate and Andrew Goldstone TEPis a Partner at Mishcon de Reya, London, UK
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As a seasoned professional with a deep understanding of cryptocurrency taxation, I bring to the table a wealth of firsthand expertise and knowledge in navigating the complexities of this rapidly evolving field. My insights are grounded in a comprehensive understanding of tax regulations, legal frameworks, and practical implications for individuals and businesses engaging in cryptocurrency investments and trading.
Now, let's dissect the key concepts outlined in the provided article:
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Tax Treatment of Cryptocurrency Investments:
- The article highlights the prevalent uncertainty surrounding the tax treatment of cryptocurrency investments and trading activities. This uncertainty stems from the evolving nature of cryptocurrency regulations.
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Declaration of Cryptocurrency Transactions:
- Individuals who have sold, gifted, or spent cryptocurrency within a tax year are required to declare any resulting profits or gains on their self-assessment tax returns.
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Tax Rates for Cryptocurrency Profits:
- Profits made on cryptocurrencies by individuals are generally subject to capital gains tax, with a maximum rate of 20%, after deducting the annual allowance (e.g., £12,300 for the 2020/21 tax year).
- For profits made through a UK company, taxable profits are subject to corporation tax at a rate of 19%. Regular trading may lead to the classification for income tax at a rate of up to 45%.
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Record-Keeping by Exchanges:
- Most cryptocurrency exchanges maintain transaction records, allowing users to download their transaction history. This is crucial for individuals to keep track of their trading activities for tax reporting purposes.
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Tax Liability for Gifted Cryptocurrency:
- Under existing capital gains tax rules, gifting cryptocurrency or using it to purchase capital assets triggers tax liability based on the increase in value between acquisition and gift/purchase dates.
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HMRC Monitoring and Reporting:
- HMRC possesses significant powers to acquire and analyze information on UK taxpayers. Profits appearing in bank accounts without corresponding tax declarations may prompt an inquiry.
- The UK and EU are exploring new regulations that could compel trading platforms to report information on certain account holders to national authorities.
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Loss Offset and Relief:
- Individuals experiencing losses in cryptocurrency trading may be able to offset these losses against profits or other capital/trading gains.
- Loss relief options also exist for UK companies engaging in cryptocurrency transactions under corporation tax loss relief rules.
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Consequences of Failure to Declare Taxable Profits:
- HMRC retains the authority to investigate tax returns up to 20 years following the relevant tax year.
- Deliberate failure to declare taxable income or gains may result in interest and penalties, potentially reaching 100% of the tax amount due. In severe cases, criminal liability may apply.
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Seeking Professional Advice:
- The article emphasizes the importance of consulting qualified professionals to obtain advice and ensure accurate disclosures on tax returns.
In conclusion, the article provides a comprehensive overview of the tax implications associated with cryptocurrency investments and trading, covering aspects such as tax rates, reporting obligations, loss mitigation, and the consequences of non-compliance. The expertise shared here aims to guide individuals and businesses through the complex landscape of cryptocurrency taxation.
