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HMRC applies tax on cryptocurrency, so you need to know how to report it on your Self Assessment.
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Cryptocurrencies are decentralised digital currencies that don’t rely on banks or central authorities to record transactions and issue new units.
Transactions are recorded through distributed ledger technology (the best known of which is blockchain). This prevents a unit from being used twice and enables data to be shared globally.
The best-known cryptocurrencies are Bitcoin, Ethereum and Litecoin.
Many people buy and sell cryptocurrency as an investment. This means that HMRC views them as assets (it doesn’t recognise them as currency or money) and you’ll need to pay tax on the profit you make.
But because the market is new, the rules around tax on cryptocurrency have been evolving rapidly.
If you buy and ‘dispose’ of cryptocurrency as a personal investment, you’ll pay capital gains tax on the profits you make.
HMRC refers to cryptocurrency units as tokens. It says that disposal is a broad term that includes:
The capital gains tax rates for disposing cryptocurrencies are:
The tax-free allowance for capital gains tax is £12,300.
Your gain is usually the difference between how much you paid for an asset and what you sold it for. You pay capital gains tax on your gains above the tax-free allowance.
There are some cryptocurrency-specific ‘allowable costs’ that you can deduct from your gain, including:
You can’t deduct costs if you’ve already done so against profits for income tax, or for the cost of mining activities (like equipment or electricity).
It’s also important to get to grips with HMRC’s ‘pooling’ concept. While HMRC says that this ultimately makes for easier capital gains tax calculations, it can be a complex topic.
When working out your gain, you group each type of token into a pool, which is also what you need to do for regular investments in a single company.
But you don’t group tokens into pools if you buy them on the same day that you sell tokens of the same type, or within 30 days of selling tokens of the same type.
Find out more about cryptocurrency pooling and capital gains tax in HMRC’s manual.
You report gains on cryptocurrency on your annual Self Assessment tax return.
You can also use HMRC’s real-time capital gains tax reporting service. Remember that gains are reported in pound sterling.
As usual, it’s important to keep accurate records for your taxes, which includes your cryptocurrency activity too. HMRC says this means the:
If you’re not sure about anything, speak to HMRC or a professional adviser.
The above information is for Self Assessment taxpayers who buy and dispose of cryptocurrency as an individual.
However, some businesses and companies may be carrying out activities involving cryptocurrencies, including:
If your business does any of these, various taxes may apply, including:
You’ll have to report tax on your Self Assessment tax return or your company tax return.
HMRC’s detailed cryptoassets manual has more on the tax treatment of business activities that involve cryptocurrency.
But as this is a complex topic, it may be best to get professional advice.
Would you like us to write about any other cryptocurrency topics? Let us know in the comments below.
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