Original content provided by BDO United Kingdom
The annual deadline for filing individuals’ self-assessment tax returns is 31 January, so it is important to understand the tax implications of any digital, cryptoassets or transactions. Here are some useful steers for those investing in crypto on how to report their transactions.
Tax on cryptoassets
HMRC sees the profit or loss made on buying and selling of exchange tokens (the most common form of crypto - think Bitcoin and Ethereum) as within the charge to Capital Gains Tax (CGT). Its guidance says that only in exceptional circumstances will HMRC accept that buying and selling of crypto amounts to a trade for tax purposes.
For individuals, this means that if you have sold crypto for a profit during the tax year (i.e. sold for a price greater than the cost), you may have a reporting and tax obligation, and need to consider whether you need to file a tax return. Here are some key taxation points to bear in mind:
- A disposal of crypto occurs when it is sold for money, exchanged for another cryptoasset, used to pay for goods or services, or given away to another person (except a spouse or civil partner, and sometimes gifts to a charity).
- If your profit is more than your available CGT annual allowance (£12,300 for 2021/22), you are likely to need to file a tax return to pay the CGT. Even if your profit is within your CGT annual allowance, if the proceeds are more than four times the annual allowance (ie £49,200 for 2021/22) you need to file a return.
- However, if you sold cryptos for a loss, you may be able to offset those losses against other capital gains in the same tax year or carry forward the losses for future offset. You need to register the losses within four years of the end of the year they arose, otherwise you could lose them.
- You will need to consider how to work out the gain/loss and apply the ‘pooling’ and maybe ’bed and breakfasting’ rules. This does not apply to non-fungible tokens (NFTs), as these assets can be separately identified.
- Earnings from employment paid in crypto, rewards from mining activities, staking and airdrops are also within the scope of taxation. The mode of taxation will likely vary from that noted above for buying and selling transactions. Read more here
- Valuation for tax purposes needs to be in GBP sterling, so crypto denominated in non-sterling value will need to be converted at the transaction date.
Have you got good records?
HMRC’s Compliance Handbook states that “a person must keep and maintain records in order to make a correct and complete return or claim even if they don’t make a return or claim every year”.
For working out capital gains or losses, individuals will need to retain records of their acquisitions of crypto to enable them to accurately compute the gain or loss for the tax year of disposal. For a person not carrying on a trade, profession or business, the deadline for a return submitted on time is generally the first anniversary of 31 January following the end of the tax year, and records must be kept for at least a further 12 months (HMRC can enquire into your tax return, and will typically do so within that first 12 months).
You may find that crypto platforms or exchanges only retain records for certain periods of time. However, this is expected to improve as the next phrase of automatic exchange of data involving countries around the world (the Common Reporting Standard) will include digital platforms. As HMRC will, in future, get data direct from crypto platforms and exchanges – they should be able to identify those taxpayers who have not reported their transactions correctly. See New tax transparency framework for crypto-assets.
HMRC can issue ‘nudge letters’ asking the recipient to self-certify that their tax affairs are in order and give them an opportunity to make a voluntary disclosure, if not.
In the more serious cases, where HMRC suspects that cryptoassets represent ‘recoverable property’ (i.e. property obtained through unlawful conduct) or that is intended to be used in unlawful conduct, then it can apply to have the assets frozen under the powers available to it in the Proceeds of Crime Act 2002 (POCA). HMRC can also open a serious tax investigation.
If you have any questions, please contact Fiona Hall.