Taxation in UK
Tax on Crypto Assets
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Understanding the taxation of Cryptocurrencies in the UK is vital if you are concerned about your crypto assets. You may have heard that they tend to fall outside the ordinary purview of income in the UK – much like the Lotto. If you win money, you don’t pay tax on it whether you gamble or beat with a Lotto ticket. Unfortunately, this is one misconception that isn’t true regarding the taxation of Cryptocurrencies. The first step is to grasp what crypto assets are, and once you do, you can better comprehend cryptocurrencies and taxes in the UK.
You may have heard of crypto assets, but only as cryptocurrencies. These are digital value representations that may be exchanged, stored, and transferred. The most well-known cryptocurrency is Bitcoin, stored on your computer in a virtual wallet and accessed through applications or websites. The government or banks don’t control cryptocurrency, and every transaction is recorded on a blockchain, a public ledger. This uses Distributed Ledger Technology, which records all simultaneous transactions.
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When it comes to taxation, HMRC does not consider crypto assets as a currency. They are instead grouped into categories:
- Security tokens. These provide the holder certain rights in a business. This could be in the form of a sum of money or ownership stakes in the business. It even works for future stakes in the business that haven’t grown yet.
- These are a very prominent type of crypto asset, and they minimise the volatility of the coin because they can be toggled to something with a stable value. In the main, this includes things like government-backed currencies or precious metals.
- Utility tokens. These provide the holder with access to services or goods using the right Distributed Ledger Technology. As a business or a group of businesses, tokens are issued and they are then committed to accepting tokens as a payment for the services and goods in question. They can even be exchanged for tokens with others.
- Exchange tokens. Exchange tokens are purely for means of payment and are very popular. Bitcoin is a popular example of an exchange token. They are growing as an investment increases in value – it’s worth investing here because the return later is exactly what you need!
Taxing for the tokens depends on what they are used for rather than the definition of the token itself. Anyone who resides in the UK with crypto assets has to be taxed on any received profits that they have managed to gain due to holding these assets. This is known as Capital Gains Tax, and this means that you will pay tax on the difference between what the cryptocurrency costs vs what you initially sold it for. You only have to pay this tax, however, above your current Annual Exempt Amount. The allowance you can have before you are charged Capital Gains Tax is currently £12,300. So if you bought your asset with cryptocurrency for £12,000, for example, you have to pay up to 20% depending on your income unless it’s within your free allowance. You can speak to a tax expert to clarify this if you would prefer, and they can talk you through everything you need to know about the taxation of Cryptocurrencies that you may hold. You need to pay tax on that profit when you have made a profit, so make sure that this goes on your Self-Assessment tax return.
What counts most to HMRC are the gains you make on the sale of your assets. If you do not trade them, you do not pay tax on them, and hence your initial investment is tax-free. If no disposal occurs, no tax is required, and it’s worth noting that HMRC obtains information from crypto exchanges. There is no way to avoid paying taxes when they are due, so be informed of your responsibilities before trading and investing in crypto assets. If you decide to trade one form of crypto asset for another, this is considered an asset exchange.
Yes and no. There are certain occasions where you may have to toe the line as to what constitutes ‘trading’ and what isn’t. HMRC may have a definition which you are not yet aware of, and thus you must be cautious about your activities while buying and selling cryptocurrencies. Profits from all trades are subjected to the same income tax up to 45 per cent – depending on your income level. This doesn’t include CGT. HMRC may consider mining and staking to be trading and hence subject to tax. However, this is unusual.
Any activity involving the exchange of tokens requires the organization to pay tax. This may include buying and selling tokens, exchanging tokens for other assets, giving products or services in exchange for tokens – there are a variety of scenarios in which you may be required to pay tax, so make sure you ask! It’s always better to inquire and find out for sure than to guess.
Exchanges may only maintain records of transactions for a shorter amount of time, or the exchange may not be in existence when a person completes a tax return. It’s up to you to maintain your own records and track your assets appropriately. The one thing that you need to look out for is that there is a chance of your earnings evaporating by the time the tax payment is due. Financial plan is vital from the minute you determine that it’s a good idea to hold crypto assets.
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