Most people have heard of Bitcoin and have an awareness of the existence of cryptoassets. But do you actually know what cryptoassets are, and more importantly, do you realise that you may need to be reporting transactions in cryptoassets on your tax return?
HMRC published a report in 2022 in which they stated that 10% of UK adults hold or have held cryptoassets. It seems that cryptoassets mainly appeal to younger people and to men. Most people say that they have cryptoassets because they are a “fun investment”, although some take such investments very seriously.
There are many different types of cryptoassets. Cryptocurrencies (such as Bitcoin and Ethereum) are the most commonly held but there are many other cryptoassets which are less like currency, such as non fungible tokens (NFTs).
Cryptocurrencies share a lot of similarities to non-digital currencies, known as fiat currencies (which are government controlled):
Cryptocurrencies circulate on a “blockchain”, which is cryptographic computer networking technology. A person’s holding is accessed using their “private key” which is normally stored in a “wallet”. If someone loses their key, they lose their cryptocurrency, forever or until they find it again. In one instance, a man threw away a laptop hard drive containing Bitcoin he believed was worth more than £200m and offered his local council 25% of the value to search for the hard drive in landfill!
In contrast to cryptocurrencies, tokens offer functions such as representing a physical asset, e.g. a piece of artwork. They can be bought, sold or traded but aren’t used as a medium of exchange.
What about tax?
At this time, there is no specific legislation for the taxation of cryptoassets but HMRC have provided some guidance on how the existing tax rules apply to cryptoassets. As you might expect given the high tech nature of cryptoassets, the tax treatment continues to develop due to the evolving nature of the underlying technology and the areas in which such assets are used.
There are two important things to note for tax purposes:
The starting point for the tax treatment is to determine whether an individual is trading or investing in cryptoassets. HMRC usually take the view that individuals hold cryptoassets as investments and are therefore subject to capital gains tax on disposal.
Calculating capital gains can be challenging due to valuation issues. The crypto market is highly volatile and many assets are traded on non sterling exchanges. It is also common to exchange one cryptoasset for another.
HMRC view different types of cryptoassets as separate assets. Therefore, swapping one cryptocurrency for another will trigger a disposal for capital gains tax purposes. Even using your cryptocurrency to buy a physical object will mean that you have disposed of your cryptocurrency and will need to consider whether a gain has arisen.
Income tax can also apply, for example if cryptoassets are received as employment income, in which case they are likely to be subject to PAYE and National Insurance contributions. Income tax could also be relevant instead of capital gains if a person is trading in cryptoassets.
Detailed records of cryptoasset transactions will need to be kept, which might be on a spreadsheet or using specific software.
Is it a good idea to invest in cryptoassets?
Well, we can’t tell you that! As with most investments, there will be winners and losers. Although with the relative volatility of such assets and the increased risk of fraud due to lack of regulation, we would recommend that you seek advice before getting in too deep.
But we can help you to navigate the tax effects of your investments and transactions, including correcting the position for past tax years if you did not know that you had to report your crypto activity. Just get in touch if you would like to discuss this further.
