Tax season is here within the U.K. — and it’s time crypto investors buckled right down to file their cryptocurrency tax returns correctly. There are tons of indications that the U.K.’s Her Majesty’s Revenue and Customs (HMRC) is beginning to take a stern view of crypto tax evaders.
The first cryptocurrency guidance was released back in 2018 after a special report was submitted by the Cryptoassets Taskforce — an initiative launched by the HMRC together with the Financial Conduct Authority (FCA) and Bank of England. These guidelines clarified some important details about how HMRC views cryptocurrencies, which many see as a prelude to a stricter approach toward crypto taxation.
HMRC also sent requests to some major crypto exchanges (including Coinbase) for information about their U.K.-based investors in August of 2019. this is often exactly what the United States’ IRS did before they sent out warning letters to suspected crypto tax evaders.
All this is often to mention that HMRC looks to be fairly serious about crypto evasion — which suggests that tax filings will become especially important this year. Here are a number of the foremost important belongings you should realize crypto taxes within the U.K.
Cryptocurrency Is an Asset
For all practical purposes, cryptocurrency may be a digital currency. However, when it involves taxation, HMRC looks at cryptocurrency as an asset. this suggests that disposal of crypto is subject to Capital Gains Tax. This categorization is being widely adopted by tax agencies; even the U.S.’s IRS views cryptocurrency as property for tax purposes rather than a currency.
When Are Crypto Transactions Taxable?
HMRC says that you simply got to pay capital gains tax on every disposal of cryptocurrency. Disposal here refers to the following:
It’s important to stay in mind that charitable donations of crypto aren't subject to capital gains tax. Of course, if the donation is tainted or if it the crypto is sold to the charity at a price greater than the acquisition cost, then capital gains tax will apply.
How Much Tax does one got to Pay?
The actual capital gains tax to be paid will depend upon your tax bracket and therefore the marginal rate . confine mind that there's an exemption limit of £11,700: If your gains are less than this amount, you don’t got to pay any capital gains tax. If you finish up selling crypto which is quite fourfold the exemption limit (or over £46,800), you'll still need to report the capital gains in your tax returns — albeit the particular gains are below the limit.
How is that the Capital Gains Tax Calculated?
In the U.K., cryptocurrency gains are calculated using share pooling. most of the people are conversant in accounting methods like FIFO and LIFO when it involves taxes. However, share pooling is sort of different and involves using the typical cost of all current assets to work out the value of the assets being sold
There also are additional rules just like the same-day rule and therefore the 30-day “bed and breakfasting” rule that are wont to prevent tax loss harvesting or the practice of selling assets at a coffee price and rebuying it afterward to sustain taxable losses.
Airdrops, Mining, Staking and Other sorts of Crypto Income
Crypto transactions also happen in other forms, for instance:
In each of the above cases, you'll need to pay tax and social insurance contributions. once you eliminate the assets, you'll even have to pay capital gains tax during a similar manner as discussed before. it's important to separate the source of your crypto assets when preparing crypto taxes within the U.K. as HMRC has specifically classified hard-fork proceeds and airdrops as income.
Cryptocurrency Trading as a part of a Business
If you trade cryptocurrencies as a part of your business, then trading profits are going to be subject to tax . this type of trade is analogous to trading in securities, shares and other financial instruments — the HMRC Business Income Manual (BIM56800) deals with these transactions intimately .
Keep Accurate Records of Your Transactions
HMRC recommends keeping detailed records of all of your crypto transactions. Since even crypto-to-crypto trades are taxable, you'll got to find out the worth of the crypto at the time of sale — which could prove very time consuming if you're running bots.
Another thing to think about is that crypto exchanges don’t always provide complete records, so it’s best to be proactive and keep a log of your trades. Nowadays, there also are tools like Koinly, Cointracking, Lukka (formerly Libra), BitcoinTaxes et al. which will assist you together with your record keeping for tax purposes.
The Bottom Line
Given that HMRC has made it some extent to clarify regulations around crypto taxes and has also started posing for information about U.K.-based traders from crypto exchanges, it’s time to urge your affairs so as . If your crypto tax returns aren’t completely up-to-date, you ought to use this year to urge things sorted — even filing amended returns if you would like to. The tax returns for the 2018–2019 tax year are due at the top of January!
Shadrach is a Trending Journalist. His first job was as a newsreader and journalist at an award winning magazine. He spends most of his time scouring the internet for the hottest topics to share with his readers.