Cryptocurrencies are becoming increasingly popular, meaning that HMRC are paying more attention to them, and have now released more comprehensive guidance on the taxation of cryptocurrencies.
Read more of our blog to find out more, or you can download the full guide here –
What are cryptocurrencies?
Cryptocurrencies, such as Bitcoin, are digital assets that utilise peer-to-peer technology based on a distributed public ledger called Blockchain, which is a very secure system. There are also over 1,000 cryptocurrencies, such as Ethereum, Ripple and Litecoin.
How can I use them?
Mostly, private investors buy cryptocurrency as they believe they will increase in value. As they are decentralised and don’t rely on mainstream global banking system, they are attractive to many people and businesses, as transferring large sums of money through cryptocurrency is efficient. Nasdaq have reported that companies such as Microsoft and PayPal are using cryptocurrency, demonstrating their growing popularity.
What are the taxation rules for personal cryptocurrency?
Many people decide to hold cryptocurrencies as investments with the aim to make profit. As such, capital gains tax is likely to apply, meaning a tax payment on profits will be due. However, losses can be used to offset taxable gains. Whilst cryptocurrency value can shift dramatically, HMRC does not consider cryptocurrency investment to be gambling – which is different to the 2014 guidance, so things are definitely evolving.
What are the capital gains tax rules?
In the 2019/20 tax year, the capital gains tax rates for non-residential property assets are 10% of the taxable gain for basic-rate taxpayers and 20% for higher-rate taxpayers. There is an exemption for the first £12,000 of gains in the tax year ending April 2020.
Capital gains and losses are confirmed at the point of disposal of the asset. Cryptocurrencies can be disposed by:
- Sold for classic currency such as GBP or USD
- Exchanged for a different cryptocurrency
- Used to purchase a product or service
- Donated/given away
Furthermore, some allowable costs can be deducted from the value of cryptocurrency disposal:
- Initial purchase price
- Transaction fees associated with being added to blockchain
- Advertising costs
- Valuation costs
- Costs associated with drawing up the contract
Mining costs and deducting against profits for income tax are not permitted when calculating tax liability.
What is cryptocurrency mining?
Mining is the process of applying computing knowledge and research to help the production of cryptocurrencies, resulting in a reward, usually in the form of an amount of cryptocurrency. In order to be considered a taxable trade, HMRC consider how organised the activities are, how often it is done and the commercial value of the operation. In the case of successful mining or the receipt of a fee, the benefit would be subjected to income taxation.
What are cryptocurrency airdrops?
Cryptocurrency airdrops are when you receive an amount of a cryptocurrency without purchasing it directly from a vendor. For example, you may receive cryptocurrency through a marketing campaign or as a gift. If the airdrop is payment for a service provided by you, then it will be taxed as miscellaneous income.
What if I am paid in cryptocurrency?
If you happen to be paid in employment income, it will then be taxed as money’s worth, so that will be income tax and national insurance contributions on the value of the asset once it is paid.
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