Given the huge spike in prices of Cryptocurrencies in early 2018, and again now in 2021, along with the growing interest in ICO’s and purchase/sales of various Crypto’s, it’s important to understand the tax position on any profits (or losses….) generated from your Crypto activity.
As tax returns for the year ended 5th April 2021 will soon need to be completed, and there were some large sums of money made whilst prices skyrocketed in late 2020/early 2021, a lot of early investors made considerable sums of money and should now be preparing to declare that to HMRC, if relevant.
The tax treatment of Crypto’s were originally covered in HMRC’s Brief 9 (2014), so it could be said that the guidance is somewhat outdated, given the ongoing development in the industry. However, there are still general tax principles that can be applied, and these are referenced in the tax guidance.
This is a topic of growing interest for our clients, so we have produced a summary of the various tax considerations below.
Let’s start with the easy bit! The sale/purchase of Crypto’s are either treated as Exempt or Outside of the Scope of VAT, dependent on various factors. Effectively, this means that VAT should not be an overriding tax concern.
Don’t forget though, that if you are buying or selling a product/service and making payment using a Crypto, the underlying product/service may still be VATable.
Dependant on the activity of the company, there could be two occasions at which the Crypto is taxable.
Firstly, if the company is not deemed to be ‘trading’ in Crypto, then profits/losses would be taxable under Non-Trading Loan Relationship rules. What does this actually mean in real life? If the underlying tokens that you are holding increase in value of the course of a yuear, the increase would become subject to Corporation Tax.
In contrast, if your company is setup to trade Crypto it would be taxable on any profit’s generated over the course of its financial period.
In either scenario, the current rate of Corporation Tax would apply (19% when this was written).
But I own the Crypto’s personally so Corporation Tax doesn’t apply.
Because this is any investment it’ll be treated as a Capital Gain, right?
This is something that accountants will have heard hundreds of times. Not necessarily in relation to Crypto's, but when talking about a property development/flip. In essence the same principles apply.
If you display the badges of trade, HMRC will likely argue that the profits that you have generated are subject to Income Tax at the usual rates – 20/40/45%. They could also look to levy a Class 4 National Insurance charge at 9/2%
The badges of trade could take up an entire post in their own right, but if you were frequently buying/selling, or purchased with the sole intention of selling at a future profit, you could be exposed to Income Tax on your profits.
Capital Gains Tax
If, in contrast to the above, you genuinely made a purchase with the intention of holding the asset as an investment, Capital Gains Tax will apply to the gain arising on the eventual sale of the investment.
CGT comes with the additional benefit of its own annual tax-free exemption (currently £12,300). This means that the first £12,300 of gains will be tax-free, with the excess being subject to the applicable tax rates of 10/20%, subject to the level of your other personal income.
It is clear to see why many would see it far more attractive to declare the income generated from a Crpyto sale as a Capital Gain, but you must tread carefully to ensure that you do not leave yourself exposed to a future challenge by HMRC. The last thing you would to do is end up with a request for additional taxes once you have spent your hard-earned gains!
As with anything involving tax, good record keeping will make it far easier to ensure that the correct tax treatment is applied. You’re not expected to make any tax declarations when you make that initial purchase but remember to keep a record of the amount spent and what you received in return for that payment (especially when considering Crypto mining). Screenshots are better than nothing!
If you have any questions in relation to your Crypto activity we'd love to hear them.