With the number of individuals seeking advice in relation to their Cryptoasset holdings and investments, finding clarity and deciphering the implications can be challenging.
Over the past few years the Crypto space has seen rapid growth and development, whilst experiencing a number of new challenges alongside the ever present volatility factor of the market.
The definition of Cryptoassets is such: a digital asset using cryptography to generate ‘tokens’ and verify the transfer of those tokens between owners. One of the main advantages of this area of technology is that it is decentralised, meaning that it functions without a central authority (like the FED or Bank of England).
Despite the advantages of decentralisation, it is important to understand there are tax filing and reporting obligations associated with Cryptoassets. This entails ensuring that one’s affairs are kept in good order and all relevant transactions are reported to HMRC.
Some fundamental principles exist that anyone engaged in the Cryptoassets space needs awareness of in the UK; the first is to assess whether income tax and/or capital gains tax applies.
HM Revenue and Customs is able to determine if activity in the Crypto space should be treated as ‘trading’ and therefore subject to tax. It outlines 9 ‘badges of trade’. These determine if an activity is trading and therefore taxable. It is, however, worth noting it is not necessary to satisfy the requirements of all these ‘badges’ when deciding if an individual is actively trading.
On the other hand, those who hold investments passively for the long term (in the hope they will grow in value) will be subject to capital gains tax on disposal. The following sections help to draw out the more common instances of when a client is trading and subject to income tax (along with the associated tax rates applicable) and, alternatively, when CGT rates apply.
Income tax and applicable income tax rates
The following transactions are likely to give rise to an income tax implication:
- Earning Cryptoassets, for example through loaning or staking
- Mining of Cryptoassets, for example for Bitcoin, Ethereum, etc.
- Receiving remuneration in the form of a Cryptoassets like Bitcoin.
The applicable income tax rates are:
- £12,570 personal allowance at 0% – unless income received during the tax year is in excess of £100,000, in which case this allowance is tapered away by £1 for every £2 over the £100,000. For taxable income exceeding £125,140 the personal allowance will be reduced to nil. (2022/23 Tax year).
- Basic rate £12,571 to £50,270 at 20%
- Higher rate £50,271 to £150,000 at 40%
- Additional rate £150,000+ at 45%.
Capital gains tax (CGT)
The following transactions are likely to give rise to a capital gain tax implication:
- selling Cryptoassets for fiat currency
- spending Cryptoassets to purchase items or a service
- gifting of Cryptoassets
- exchanging one Cryptoasset for another.
CGT has an annual exemption of £12,300 (2022/23). Any gain up to or within this value will not be subject to capital gains tax.
Beyond £12,300, a 10% rate will apply to the gain between £12,571 and £50,270 – but only on the basis that the individual has no other taxable income during the relevant tax year. A 20% rate applies for capital gains in excess of £50,270.
HM Revenue and Customs’ position on Cryptoassets
HMRC have produced a Cryptoassets Manual to provide ‘guidance’ on the tax treatment for individuals and businesses. This also outlines HMRC’s current approach to Decentralised Finance (DeFi) protocols.
- detailed tax report to accompany an individual’s UK Tax return
- review and analysis of the tax treatment for Cryptoasset transactions
- tax planning advice, including the timing of disposals, and maximising the available exemptions
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