Declaring Cryptocurrency Profits On A Tax Return

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Many cryptocurrency investors aren’t clear if they need to declare the profits on their digital currency trades and, if so, how to go about it.

In short, if you’ve sold, spent or gifted any cryptocurrency, you might need to declare profits made (or gains on investment) through the HM Revenue & Customs self-assessment tax return process.

The potential penalties for failing to declare those profits include fines and interest charges, so it’s essential to get it right.

Here’s what you need to do and the potential associated tax liability.

UK Tax Rules For Cryptoassets

The confusion with crypto taxes is that, while you might keep coins in a digital wallet and use them to pay for goods or services, they aren’t treated the same way as money or a foreign currency.

HMRC sets four categories:

  • Exchange tokens are for payments or as an investment. Bitcoin, for example, is a type of exchange token.
  • Utility tokens give the owner access to specific goods or services. For example, a business might issue tokens or accept them as payment. Owners can trade utility tokens through exchanges or peer-to-peer transactions, just like an exchange token.
  • Security tokens indicate a business interest or right, which might mean owning shares in a company, entitlement to some of the future profits, or a specific payout.
  • Stablecoins are designed to be less volatile and are a crypto asset pegged to an existing conventional currency or a precious metal.

You need to know what types of tokens you have since the tax treatment will rely on this categorisation.

How Does HMRC Tax Cryptocurrency Profits?

Since crypto coins are an asset, you need to declare profits made and pay the associated Capital Gains Tax if you live in the UK as a taxpayer.

Everyone has an annual tax-free allowance (£12,300 for 2021/22), so anything above that is taxable.

Note that the Annual Exempt Amount, applied to Capital Gains Tax, isn’t the same as your tax-exempt personal allowance, applied to income tax.

Let’s take a straightforward example to show how that might work in practice:

  • You buy a cryptocurrency for £8,000.
  • It appreciates and is now worth £12,000.
  • You pay Capital Gains Tax on your £4,000 profit.

The exact tax you pay depends on your overall income, but the tax rate will be 10 per cent or 20 per cent.

If you have no other capital gains, and haven’t used your tax-free £12,300 allowance, you won’t pay anything at all – but otherwise, you’ll be taxable on the amount over and above your allowance.

You should declare the profit on a self-assessment tax return, which may mean registering with HMRC if you otherwise only receive income through PAYE employment.

Crypto Profits Are Income Sometimes

HMRC considers some crypto asset transactions as trading, which means Capital Gains Tax does not apply, but income tax.

UK profits from crypto trades treated as income mean that you’ll pay tax on the relevant income tax band, less your income tax personal allowance.

That could mean a liability of up to 45 per cent for additional rate taxpayers.

Activities including mining and staking are potentially subject to income tax, although it’s somewhat unlikely.

Taxes On Gifted Cryptocurrency

Capital Gains Tax rules mean that if you give cryptocurrency as a gift or exchange your coins for another currency, you need to pay tax calculated as the value increase from the date of your original investment and the date you made the gift or trade.

The usual allowances apply, and gifted cryptoassets are still taxable if your earnings are treated as income or liable for corporation tax as a business.

Declaring Losses On A Crypto Investment

You won’t need to pay any tax if your cryptoassets have fallen in value and you have made a loss, but it’s worth declaring since you might be able to offset that loss against other profits.

Loss relief is equally available to companies if you trade through a UK business to reduce your corporation tax bill.

You’ll need to file your tax returns to claim the offset.

HMRC won’t expect you to pay any tax if you haven’t done anything with your cryptoassets – so if you aren’t trading them, there isn’t a profit to declare.

In essence, you become liable for Capital Gains Tax when there is a crystallising event – i.e. an occurrence where you realise that profit and exchange your cryptocurrency for something else.

It isn’t possible to calculate your gain accurately if you haven’t disposed of the crypto coins, and the exact value taxable will depend on the information resulting from that exchange.

However, exchanging one cryptocurrency for another does count as a disposal, and you would need to declare your profits.

Need Help with your Finances?

Tax Planning for Cryptoasset Investments

Just like any other income, business or self-employment, you can plan for your tax bill depending on what you expect to do with your cryptocurrency coins.

It’s wise to submit returns promptly because the significant risk is that the volatility of cryptocurrencies will make it challenging to pay your tax bill if your assets have since dropped in value.

For example:

  • If you make a gain on a cryptocurrency exchange in 2020/21, your self-assessment tax return and payment falls due on 31st January 2022.
  • In those interim ten months, if your assets have fallen in value and you’ve made a loss, you won’t be able to claim a loss offset until the new tax year ends on 5th April 2022.
  • HMRC won’t defer a tax bill (although you might be able to set up a Time to Pay agreement), but the issue remains that your tax remains payable before you can offset a subsequent loss.

The best way to avoid this problem is to promptly declare your profits when the tax year ends and use the gain to pay the arising tax charge.

You can work with a tax adviser or financial planner to keep up to date with your tax account, and you should always ensure you keep records for every transaction to support any claims you need to make.

Records include the type of crypto assets you own, transaction dates, the exchange made, the number of units and value in sterling, a cumulative total of all your investment units, and backup documentation such as bank statements or wallet addresses.

Frequently Asked Questions – Declaring Cryptocurrency Profits

Do companies pay tax on crypto trades?

If you buy or sell crypto assets through a business, that usually means paying a 19 per cent tax charge.
Businesses are liable for tax on any crypto activities involving exchanging tokens, including purchasing or selling exchange tokens, swapping tokens for another crypto asset or any other resource, and receiving exchange tokens in payment for goods or services.

What are crypto assets for tax purposes?

Crypto assets come in thousands of types and are categorised into different categories by HMRC, as seen above.
 
Cryptocurrencies are digital units of value, or a contractual right, secured cryptographically. That includes any digital currency that you can transfer, store, or trade.
 
Your coins are kept in a virtual wallet, which you access through a platform or app. The confusion arises because there isn’t any regulatory body or bank that oversees the management of this system.
 
Each crypto transaction is recorded via blockchain (like a public register), and you can download reports showing trades and transactions to help complete your tax return.

How does HMRC know if I own crypto assets?

It’s never wise to assume that the tax office doesn’t know that you have crypto assets, and the penalties for failure to declare profits can be considerable.

HMRC has a range of analysis tools and will raise an audit into your tax affairs if it has reason to believe you have more earnings flowing into your bank account than your tax returns imply.

As crypto becomes more commonplace, the government will likely introduce regulations, obligating crypto platforms to report on account holders.

Why are cryptocurrency profits taxable?

It’s a common myth that crypto assets can’t be taxed because investing in a cryptocurrency is more like gambling than earning an income.

That is incorrect, and cryptoassets are taxable like any other, usually through the Capital Gains Tax system.

What happens if I don’t declare my profit on cryptocurrency trades?

HMRC can investigate your income up to 20 years after the end of the tax year, so if you haven’t reported a profit in one period, that doesn’t mean to say it won’t catch up to you.

Taxpayers who deliberately avoid declaring gains can be liable to penalties and interest, up to 100 per cent of the amount owing.

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