Cryptocurrency Tax in the UK – Understanding Your Obligations

In recent years, cryptocurrency has grown in popularity as an investment choice, with many people seeking to benefit from the potential profits available. But just like with any investment, it’s crucial to comprehend how purchasing and selling cryptocurrencies will affect your taxes. Cryptocurrency is taxable in the UK, and the amount of tax you must pay will depend on a number of variables.

Types of cryptocurrencies

There are thousands of various cryptocurrencies, each with its own special features, applications, and traits. Some of the most well-known and well-liked cryptocurrency kinds are listed below:

  1. Bitcoin (BTC) – The first and most recognized cryptocurrency, Bitcoin, was developed in 2009 by an unidentified person or group of individuals using the alias Satoshi Nakamoto. It makes use of a decentralized, peer-to-peer network to keep transactions anonymous and secure.
  2. Ethereum (ETH) – Decentralized platforms like Ethereum are used to create smart contracts and decentralized apps (dApps). Its native currency is a cryptocurrency named Ether (ETH).
  3. Ripple (XRP) – A currency transaction, remittance network, and real-time gross settlement mechanism are all components of ripple. It uses a digital currency called XRP to enable cross-border payments and other financial transactions.
  4. Litecoin (LTC) -Litecoin (LTC) is a cryptocurrency that aims to be easier to use and quicker than Bitcoin. Scrypt, a distinct mining algorithm from Bitcoin’s SHA-256, is used because it is intended to use more memory.
  5. Bitcoin Cash (BCH) –A variant of Bitcoin called Bitcoin Cash (BCH) was developed in 2017. Since it is intended to have bigger block sizes than Bitcoin, transactions can be processed more quickly and with lower fees.
  6. Tether (USDT) – Tether is a stablecoin that is pegged to the value of the US dollar. This means that the value of 1 USDT is always equal to $1 USD.
  7. Binance Coin (BNB) – Binance Coin is the native cryptocurrency of the Binance exchange, which is one of the largest cryptocurrency exchanges in the world. It is used to pay for trading fees on the exchange and can also be used to access certain features on the platform.
  8. Cardano (ADA) – Cardano is a decentralized platform for building decentralized applications and smart contracts. It uses a proof-of-stake consensus algorithm, which is designed to be more energy-efficient than Bitcoin’s proof-of-work algorithm.
  9. Polkadot (DOT) – Polkadot is a blockchain platform that allows multiple independent blockchains to be connected together, creating a single network that can process transactions more efficiently.
  10. Dogecoin (DOGE) – Dogecoin is a cryptocurrency that was created as a joke in 2013, but has since gained a significant following. It uses a proof-of-work algorithm, similar to Bitcoin, and has a fixed supply of 129 billion coins.

These are just a few examples of the many different types of cryptocurrencies that are currently available. Each cryptocurrency has its own unique features, benefits, and drawbacks, and it is important to do your research before investing in any particular cryptocurrency.

How is cryptoassets are taxed in the UK?

The first thing to know is that, in terms of taxes, cryptocurrencies are regarded as a type of property. This means that any gains or loses you experience when trading cryptocurrencies are taxed as capital gains. (CGT). A tax known as CGT is levied on an asset’s rise in value from the time it was bought until it was sold. Your CGT rate will rely on your income tax bracket, and taxable capital gains have an annual tax-free allowance of £12,300.

You will only be required to pay CGT when you sell cryptocurrency if you purchase it with the intention of keeping it as an investment. However, if you regularly trade cryptocurrencies, you might be considered a trader, in which case your profits would be liable to income tax rather than CGT. In this situation, you must maintain complete records of all your transactions as well as any costs associated with your trading operations.

It’s also important to keep in mind that receiving cryptocurrency in exchange for products or services will be considered income, and you will be required to pay income tax on the amount of cryptocurrency received. The cryptocurrency’s value will be determined by the market price at the moment of receipt. You must disclose bitcoin payments on your self-assessment tax return if you are self-employed and receive them.

Key challenges associated with cryptoasset tax

Determining the value of a cryptocurrency at any particular moment is one of the biggest difficulties in taxing cryptocurrencies. This is due to how quickly and how volatilely the worth of cryptocurrencies can change. For tax purposes, HM Revenue and Customs (HMRC) has provided guidance, saying that the value should be based on the cryptocurrency’s value in sterling at the time of the transaction. The value of your cryptocurrency at the moment of each transaction must therefore be accurately recorded by you.

Who is liable to crypto-asset tax in the UK?

Determining whether or not you are a UK resident for tax reasons can be another problem when it comes to taxing cryptocurrencies. If you live in the UK, you must pay taxes on all of your money, including any profits from cryptocurrency investments. The only gains from cryptocurrency investments that are based in the UK will be subject to taxation if you are not a UK resident.

What records are to be maintained for tax purposes?

If you are involved in buying, selling or trading cryptocurrency, it is important to maintain accurate records for tax purposes. Here are some of the records that you should keep:

  • Date and time of each transaction -The date and time of each transaction should be noted because they will be used to calculate the cryptocurrency’s value for tax reasons.
  • Value of cryptocurrency at the time of each transaction -For tax calculations, the gain or loss is determined based on the cryptocurrency’s value at the moment of each transaction. You should maintain a record of the cryptocurrency’s value in GBP as well as the currency it was traded in.
  • Type of cryptocurrency – In order to calculate your gain or loss for tax reasons, it is crucial to keep track of the type of cryptocurrency you are trading.
  • Purpose of the transaction – The way the trade is taxed will depend on whether it was for personal use or investment.
  • Details of the other party – Keep a record of their name, location, and contact details if you are trading with another person or business.
  • Fees and commissions – You should maintain a record of any fees or commissions you paid in relation to the transaction.
  • Records of cryptocurrency wallets – A record of your cryptocurrency wallets, including the secret keys and public addresses linked to each wallet, is also advised.

Keeping thorough records of your cryptocurrency trades will help you determine your tax liability accurately and stay out of trouble with HM Revenue and Customs. The more organized and current your records are, the simpler it will be to determine your tax liability at the conclusion of the tax year. Consult a tax expert for guidance if you are unsure of how to keep these documents organized or what details to include.

What taxes might I need to pay?

Cryptocurrency taxes in the UK are based on the precise details of the trade and the intended use of the cryptocurrency. Some of the fees you might owe are listed below:

  1. Capital Gains Tax (CGT) – Any gains you generate from buying and selling cryptocurrencies as an investment are subject to CGT. The difference between the purchase price and the selling price of your cryptocurrency is the profit that is used to compute CGT. You must pay tax on the excess amount if the total gains you generate during a tax year exceed the CGT allowance, which is £12,300 for the tax year 2022–2023.
  2. Income Tax – You might be required to pay income tax on the amount of cryptocurrency you got if you use it to pay for goods or services. Based on your income tax rate, income tax is computed based on the cryptocurrency’s value at the moment of receipt. You must report the amount of the cryptocurrency in your yearly self-assessment tax return if you are self-employed and receive payment in cryptocurrencies.
  3. Value Added Tax (VAT) – Since cryptocurrencies are regarded as a type of money rather than a commodity, VAT is typically not due on the purchase and sale of them. Nevertheless, based on the details, VAT might be due on the products or services you buy with cryptocurrencies.
  4. Stamp Duty – Since cryptocurrencies are not considered securities, stamp duty is typically not due when purchasing and selling them. However, if you purchase shares in a business that stores cryptocurrencies, stamp duty may be due.
  5. Inheritance tax: You might be required to pay IHT if you got cryptocurrencies as an inheritance.

It is essential to remember that the tax laws governing cryptocurrencies are still developing, and that they might change in the future. Therefore, if you are uncertain of your tax obligations with regard to cryptocurrencies, it is advised that you consult a tax expert.

In conclusion, cryptocurrency is subject to tax in the UK, and the tax consequences will rely on a number of factors, including whether you are purchasing and keeping cryptocurrency for investment purposes, or whether you are trading cryptocurrency on a regular basis. The value of any cryptocurrency you obtain in exchange for goods or services will be considered income, and you will be required to pay income tax on that amount. The value of the cryptocurrency at the moment of each trade should be noted in your accurate records of all cryptocurrency transactions. You should consult a tax expert for professional guidance if you are unsure of your tax obligations with regard to cryptocurrencies.

Cryptocurrency tax advice

Are you unsure about your tax obligations when it comes to cryptocurrencies? Do you need professional advice and assistance to ensure that you are complying with HM Revenue and Customs regulations?

Our team of tax specialists is here to help. We have extensive knowledge and experience in dealing with the tax implications of cryptocurrencies and can provide you with expert advice and support.

Whether you are an individual investor, a business that accepts cryptocurrency payments, or a cryptocurrency trader, we can help you to understand your tax obligations and to ensure that you are complying with all relevant regulations.

We can assist you with a wide range of services, including:

  • Advice on the tax implications of buying, selling, and holding cryptocurrencies
  • Preparation and submission of tax returns related to cryptocurrency transactions
  • Assistance with record keeping and compliance requirements
  • Advice on structuring your cryptocurrency activities to minimize tax liabilities
  • Representation in the event of a tax investigation or dispute

Here at YRF Accountants in Bolton, our team is committed to providing you with the highest level of service and support. We pride ourselves on our professionalism, attention to detail, and commitment to achieving the best possible outcomes for our clients.

If you need help with Cryptocurrency Tax, don’t hesitate to get in touch with us. We offer a free initial consultation to discuss your needs and to provide you with an overview of our services. Contact us today to schedule an appointment.