As the popularity of crypto investments grows, a significant number of crypto owners remain unaware of the tax implications associated with their digital assets. In a 2022 survey commissioned by HMRC, only 42% of crypto owners were aware of potential tax obligations related to crypto transactions. Moreover, even when individuals are aware of a potential tax liability, understanding which tax is applicable is often confusing.
Identifying taxable events
Several scenarios can trigger taxable events related to crypto transactions, including:
- Making and receiving payments in crypto;
- Receiving employment salary in crypto;
- Earnings from mining, staking, and airdrops;
- Disposals of investments in crypto;
- Returns on investments in crypto;
- Buying and selling crypto.
Common Pitfalls
Navigating the crypto tax landscape requires awareness of common pitfalls, such as:
- Recognition that crypto is not a currency: Exchanging crypto for fiat currency or another cryptocurrency constitutes a taxable transaction, not a simple currency exchange. Similarly, when you utilise cryptocurrency to make purchases of goods or services, it triggers a disposal of your crypto assets, giving rise to a taxable transaction.
- Minimal activity does not make you exempt: Even infrequent crypto activity may result in taxable transactions, especially if you make a profit upon disposal of crypto assets.
- Unclear income classification: Profits made during taxable events may be classified as trade income, miscellaneous income, or chargeable gains. Careful consideration is therefore necessary, and it is important to seek professional advice to ensure accuracy.
Understanding tax liabilities
While ongoing consultations may shape future crypto tax regulations, the current guidance from HMRC and the crypto assets manual prevails.
In a general context, one could anticipate taxes to apply as follows:
For individuals:
- Income Tax is chargeable on employment income, trading income (see below), and ‘miscellaneous income’ where transactions do not meet the trade definition.
- National Insurance contributions may be due on employment income (Class 1) and trading income (Class 4).
- Capital Gains tax applies on disposals of crypto investments, exchanging one type of crypto for another type or for fiat currency, and buying goods or services with crypto.
For companies:
- Corporation Tax is chargeable on both corporate income and corporate capital gains.
For Businesses Owned by Individuals or Companies:
- Value Added Tax (VAT) will apply if a crypto trade surpasses the VAT threshold.
It is advisable to consider seeking professional advice, given that guidance and legislation are subject to ongoing evolution.
Determining crypto trade status
Identifying whether your crypto activity constitutes a trade involves assessing the ‘badges of trade’. The badges include (but are not limited to) the frequency and volume of transactions involved, the time investment, and the taxpayer’s intentions. HMRC have suggested that, in most cases, there will not be a crypto trade due to the level of organisation and sophistication required. It is crucial to consider the badges of trade comprehensively in order to determine whether there is a crypto trade and ensure accuracy in the consequent tax treatment.
If your crypto activities qualify as a trade, income tax takes precedence over capital gains tax. In cases where there is no trade, capital gains tax may instead be due upon the disposal of crypto assets.
For activities like mining, staking, and airdropped tokens, HMRC advises that income tax is still applicable, even if these activities do not amount to a trade. Profits from such activities are categorised as ‘miscellaneous income,’ with the key distinction that National Insurance Contributions (NICs) are not chargeable on miscellaneous income.
Addressing undisclosed historic crypto transactions
HMRC are actively targeting crypto owners with nudge letter campaigns encouraging crypto owners to disclose historic activity. In November m2023 the new disclosure facility specifically for crypto income and gains was opened.
If you suspect undisclosed taxable transactions related to your crypto dealings, it is advisable to proactively come forward. Unprompted disclosures carry lower penalties compared to disclosures prompted by HMRC.
If the time limit for filing or amending a tax return is still open, correcting errors or omissions through this avenue is the recommended approach.
In cases where the time limit has expired, rectifying your tax position can be achieved through a voluntary disclosure under the new crypto disclosure facility, particularly if any errors or omissions were not deliberate.
For instances of dishonest and deliberate behaviour, the Contractual Disclosure Facility or Code of Practice 9 process may be available for use.
If concerns about undisclosed tax liabilities stemming from your crypto activities arise, seeking specialist advice is crucial to bring your tax affairs up to date. For a free confidential discussion about your tax affairs please get in touch with Georgia Gibson-Smith or call the Tax Disputes and Disclosures team at Menzies LLP.
Offering the full range of accountancy services, Menzies is headquartered in London (with a network of offices across Surrey, Hampshire and Cardiff), and has a global reach through the HLB network. Described as the ‘best performing firm outside of the top 10’ by Accountancy Magazine, Menzies has over 500 employees and an annual turnover of more than £50m. Menzies is a member of HLB International, a global advisory and accounting network.
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