Cryptocurrency, or crypto assets as it’s also known, is digital money – it doesn’t exist physically and you can’t withdraw it from a cash machine, but it still holds value and can be held in a digital wallet that can be accessed from a smartphone or computer.
In recent years, more and more cryptocurrencies have been introduced with Bitcoin being one of the most common types. You may have heard of others, such as Dogecoin, Litecoin, Ethereum, Cardano, Ripple, XRP, Stellar or Tether.
Cryptocurrency differs from traditional currency as there are no third parties involved, money is directly transferred without any interference or involvement from the government or the bank. All transactions are recorded on a digital public ledger called a blockchain and controlled by its users and a computer algorithm.
How is cryptocurrency taxed?
Although cryptocurrency isn’t considered as ‘traditional money’, it still holds value and therefore can still be taxed by the government.
In the UK, HMRC recognises cryptocurrency and refers to it as tokens. If you are disposing of cryptocurrency, then you need to be aware that HMRC will expect you to pay tax on it. Disposing of cryptocurrency includes selling or trading, giving it as a gift, using it to buy goods or a service, converting it into government-issued currency or exchanging it for a different type of cryptocurrency. It’s important to understand when, how and where you pay tax on your cryptocurrency.
When do you pay tax on cryptocurrency?
Income Tax – If you trade cryptocurrency for your business then any profits are subject to income tax at normal rates. If you receive cryptocurrency from your employer, it will also be included in your income tax.
Capital Gains Tax – If you don’t trade cryptocurrency, HMRC treats cryptocurrency in the same way it treats stocks, so it’s subject to capital gains tax. You can have up to £12,300 tax-free and anything over will be taxed for 10% for basic ratepayers or 20% for higher ratepayers. This includes the disposal of cryptocurrency.
Corporation Tax – If you’re a limited company you will pay your usual rate of tax on gains (currently 19%, due to increase to 25%).
There are allowable cryptocurrency expenses that can be deducted from your gain (however this is not applicable if you’ve already claimed these expenses in your income tax):
- Transaction fees are paid before the transaction is added to a blockchain.
- Advertising for a buyer or seller.
- Drawing up a contract for the transaction.
- Valuation that helps you work out your gain for that transaction.
How do you pay tax on cryptocurrency as a business?
You report gains on your annual Self-Assessment Tax Return, which must be recorded in pound sterling. It’s important to keep track of everything in order to provide the right information in your tax return.
Keep a record of the:
- Buying and selling exchange tokens.
- Exchanging tokens for other assets.
- ‘Mining’ (creating new cryptocurrency by solving mathematical and computer equations).
- Providing goods or services in return for exchange tokens.
For more information about taxation on cryptocurrency, please see the GOV.UK website.
