Tax on Cryptocurrency Coins
It is fair to say that the authorities have been behind the curve when it comes to digital coins (generally referred to as cryptocurrency). In the early days, they ignored cryptocurrency, then its popularity grew, and they took an interest. A relatively aggressive regulatory campaign superseded several half-hearted attempts to rein in the popularity of this new type of asset.
Unable to directly impact digital coin trading platforms, the authorities targeted UK banks, banning them from transfers to cryptocurrency platforms. This allowed the regulators to consolidate their position, bring out a regulatory structure for the future and effectively take control of the sector. So how are digital coins taxed, and when does the tax liability accrue?
What is a digital coin?
As mentioned above, digital coins are typically referred to as cryptocurrency, but other descriptions include virtual currency, and even central bank digital currencies are on the way. At the outset, it’s important to note that the authorities do not recognise digital coins as traditional forms of currency. In summary, a digital coin is a:-
“Money/money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the Internet”
It is important to note that digital coins take no physical form; they are electronic, despite the well-recognised “image” of a Bitcoin. Those who follow the digital coin/cryptocurrency market will be well aware of recent regulatory and tax changes.
Do you pay tax on digital coins?
There are many scenarios where you are obliged to pay income or capital gains tax on digital coin-related transactions. HMRC is now more aware of cryptocurrency trading by individuals and consequently able to chase up “missing tax”. The following actions will result in some form of tax liability:-
Buying/selling cryptocurrency
When buying and selling digital coins/cryptocurrency, it is crucial to recognise the difference between a professional trader and someone dealing relatively infrequently at low levels.
Infrequent transactions
While eligible to pay capital gains tax on profits associated with digital coin transactions, you can also offset any losses. This will count against your annual capital gains allowance, which now stands at £6000, set to fall to £3000 in the 2024/25 tax year.
Professional trader
Those regularly trading significant levels of digital coins may be formally recognised as a trader by HMRC. In this scenario, rather than being liable for capital gains tax, they would be exposed to income tax on trading receipts. As this is deemed similar to self-employment income, you may also be liable to pay national insurance contributions.
Payment in crypto
In the past, we have seen employers try to circumnavigate income tax and national insurance for their employees by paying them in crypto. This loophole has been closed, with any payments now liable to income tax and national insurance contributions.
Mining digital coins
For many people, mining digital coins has been highly lucrative and, in some cases, flown under the taxation radar. However, nowadays, whether seen as a business or a hobby, there will likely be income tax and potential national insurance obligations.
Staking digital coins
Akin to “lending stock”, many people create a healthy income by staking their digital coins to third parties. What many of us will probably define as an “interest” payment is taxable as miscellaneous income. It may be possible to define this income as savings income and offset it against your personal savings allowance.
When the tax is to be paid on the Cryptocurrency?
As with any other type of investment, your digital coin tax liability will accrue when you dispose of the asset. Some of the more common scenarios include:-
- Trading between different digital currencies, including swaps
- Transactions in stablecoins
- Selling (converting) crypto into any traditional currency, such as the pound
Many people will be surprised to learn that trading between stable and digital currencies is, in effect, a transaction. Even though the rate of the stablecoin may remain relatively constant, you are buying and selling into another asset.
Due to the unique nature of digital coins, you may be liable to capital gains tax when spending your crypto on any products or services. In this scenario, you are trading digital currency for a product/service, which is, in effect, a disposal.
So, in summary, a potential tax liability will accrue at the point of the transaction, although when this is paid to HMRC will depend upon the type of tax, income or capital gains tax.
How much tax do you pay on digital coins?
The amount of tax you will pay on digital coin transactions will depend upon the situation:-
Capital gains tax
Where your transactions in digital coins are liable for capital gains tax, these can be offset against your annual tax-free allowance (currently £6000). If you are a basic rate taxpayer, with gains above your annual allowance, you will pay 10% on additional gains, rising to 20% for those in the higher tax bands.
Income tax
There are some scenarios where you would be liable for income tax on any gains made when trading digital coins. If so, net profits would be added to your income and taxed accordingly, together with national insurance contributions. It is essential to clarify your tax situation at the earliest opportunity and update this if your situation changes.
Self-assessment of tax obligations
Tax obligations due to trading in digital coins should be part of your self-assessment and reported to HMRC. It is important to note that HMRC has access to the Know Your Client information used to sign up for UK based exchanges or wallets dealing in digital currencies. Consequently, while they may not have details of your trades, they will be aware of your interest in this area. Failure to report activity on your digital coin/crypto account could lead to further investigation and penalties.
Summary
Significant developments in digital coin/cryptocurrency regulations have occurred in the last couple of years. Using an often heavy-handed approach, regulators and HMRC are now familiar with those who have signed up for various UK-based trading accounts. Those platforms located outside the UK, not trading under UK regulations, are barred from signing-up UK-based customers. However, this is a highly complex world that, despite progress, can be difficult to track and control.
Regarding digital coins and taxation, the regulations are relatively straightforward. If you make a gain, this would likely be added to your income tax or capital gains liability. There is no escape!When the tax is to be paid on the Cryptocurrency?