A guide to cryptocurrency tax

With the growing popularity of Bitcoin and Ethereum, more and more businesses are using cryptocurrency, including the likes of Microsoft and Expedia. While the cryptocurrency space comes with a lot of opportunities and possibilities, there are certain tax rules to be aware of when trading or selling using crypto so you don't get tripped up.

In addition to our previous cryptocurrency blog, we're covering the basic tax rules you should be aware of when using cryptocurrency personally or as a business.

From an individual point of view, it's more than likely the vast majority of people are holding cryptocurrency for capital appreciation. In other words, they're hoping that the value will increase over time.

If you fall into this category, HMRC's view is that you will be subject to Capital Gains Tax on any disposal of crypto assets.

For example, if you buy some Bitcoin for £5000 and you sell it for £10,000, HMRC would look at that £5,000 as a capital gain and they'd look to tax that accordingly.

There are some exceptions to the rules:

  • if your employer has paid you in currency rather than cash.

If you were on the payroll and you were paid in crypto, that would likely be subject to tax and National Insurance under the PAYE Scheme, like a normal salary would be.

  • if you are mining cryptocurrency in a more professional environment
When professionally mining crypto, then any gains would be subject to Income Tax rather than Capital Gains Tax.

Another important thing to be aware of is that you will be taxed when you convert cryptocurrency into any different currency, whether that's Sterling, Stablecoin, or any other cryptocurrency token.

Often when people buy cryptocurrency and the value increases, they want to get out of their ownership of that cryptocurrency but they don't want to convert it back into normal cash. If that's the case, you can convert it to Stablecoin, a more stable type of cryptocurrency that usually tracks the price of the US dollar. You can then use the Stablecoin to buy new assets or convert it back into normal cash.

However, from HMRC's point of view, the disposal occurs on the date and at the value you convert into the Stablecoin, not the date that it's converted into cash. So if you convert cryptocurrency to any other token, that's the relevant tax point.

This often trips people up as they think they will only be taxed when they cash out, but the tax point is the date and the value which you move it to any other different currency, whether it's cryptocurrency or normal, centralized currency.

If your business carries out activities that involve exchange tokens, your business will need to pay tax on them.

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.

If a customer chooses to pay you for your services in cryptocurrency rather than centralized currency, that will be taxable under corporation taxes.

However, if you do keep ownership of that cryptocurrency and don't convert it back into a normal currency, you will need to allow for any fluctuation in the value of that currency within the company accounts, and that fluctuation of value is potentially taxable under corporation tax during the accounting period.

For example, you invoice a customer for £2,500 and they choose to pay you in Ethereum, which is approximately 1 Ethereum at the time of writing. If Ethereum prices increase by the end of your accounting period, the increase in value would become subject to Corporation Tax.

In this case, you won't have seen the cash that you would need to use to pay that tax bill. If you don't physically have the money to pay the tax bill, you could convert your cryptocurrency back into cash to pay HMRC, as they don't accept payment via cryptocurrency.

So, if a customer pays you in cryptocurrency, be aware that the valuation could increase quite dramatically, and you could be taxed on it, and that the valuation is always taken at a date in time that is going to be your financial year-end.

Cryptocurrency is a fast-moving space growing more and more popular amongst businesses and individuals alike. But as with any kind of currency, there are tax rules you will need to be mindful of so you don't get caught out with an unexpected tax bill.

Have any questions on cryptocurrency tax? Get in touch.


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