Cryptocurrency Tax Rules Revisited

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During 2020, a lot of us found ourselves with more free time than ever and decided to put that time to good use.

Some decided to learn a new skill, whilst others chose to pursue a hobby that they’ve never had time to pursue before.

As a result, we’ve seen an influx of queries from clients and crew who passed the time during lockdown by investing in cryptocurrencies. Some were looking for a way to invest in cryptocurrency, others to win crypto slot machine - there are lots of ways.

Now that crew are looking to withdraw their money and realise their profits, we thought it necessary to revisit the topic of how cryptocurrencies are treated for tax purposes.

If you have already begun investing in cryptocurrencies, or are thinking of getting started, it is worth familiarising yourself with the tax rules surrounding them so that you are not met with any nasty surprises further down the line.

In this article, we discuss how profit from trading cryptocurrencies is treated by HMRC, as well as the rates of tax that you can expect to pay.

Read on to find out more or jump to the section that interests you most.

Chapters

1. Current Cryptocurrency Tax Rules
2. How Profits From Cryptocurrencies Are Taxed
3. Working Out Which Capital Gains Tax Rate You'll Pay
4. Contact Us

Current Cryptocurrency Tax Rules

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1. HMRC have clarified that gains from crypto-trading are not classed as winnings from gambling as many investors had hoped, and are in fact treated as assets which will incur capital gains tax upon disposal.

It therefore follows that, if you were to buy crypto currency you don't have to declare it until you sell it.

2. If you receive a cryptocurrency as payment, as with other assets it will be assigned a market value in GBP.

3. Upon selling the asset you can calculate your gain by subtracting the initial cost (or market value) in GBP from the sales proceeds.

4. When making a purchase with a cryptocurrency, you would treat your purchase as though you have sold your cryptocurrency holding and calculate tax base upon the difference between your purchase and sale price.

5. You would treat the value of your cryptocurrency as with any foreign currency and convert to GBP for UK taxation purposes.

How Profits From Cryptocurrencies Are Taxed

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Capital Gains Tax (CGT) is the tax imposed upon the profit make when you sell an asset.

It’s important to remember that you won’t be charged tax on the entire payment received, only the income received over and above the amount which you had originally paid.

With a multitude of online platforms allowing anyone to make trades at the touch of a button; and with many crew finding themselves with some extra time on their hands at present; there appears to us to be a surge in the number of amateur traders in the industry with their eyes on a little extra money to top up their pay packets.

For the purposes of CGT, HMRC will treat the trading of cryptocurrencies in the same manner as any stocks or shares.

If you do find yourself with a profit from trading cryptocurrencies, either through a broker or through your own personal efforts, you may still find that you do not have a tax liability.

HMRC will allow you gains of up to £12,300 tax free and following on from there, the rate of tax you pay is dependent on the tax bracket that your income from other sources falls in to.

A basic rate tax payer will pay just 10% in tax on your gains from trading where as a higher rate tax payer will pay 20%.

If you are unsure as to your tax obligations with regard to your cryptocurrency trading, contact us now.

Working Out Which Capital Gains Tax Rate You'll Pay

As outlined above, basic rate taxpayers pay just 10% tax on any capital gains from trading, whereas higher rate taxpayers are subject to 20% capital gains tax.

In order to calculate whether you are deemed a basic or higher rate taxpayer, you must consider the level of your taxable income.

This is your total income minus your personal allowance and any other income tax reliefs.

If you claim the Seafarers Earnings Deduction (SED), this is an income tax relief and your taxable income is therefore £0.

This means that the first £12,300 of your profit falls beneath your capital gains tax allowance and is therefore tax-free.

Any further profits up to the basic rate threshold of £37,500 will be subject to capital gains tax at the rate of 10%, with gains above this threshold liable for capital gains tax at the higher rate of 20%.

Contact Us

If you have concerns about buying or selling cryptocurrency and how this affects your personal income tax position, we can help review your situation and offer advice.

Alternatively, let us know what you think in the comments section below, or get in touch with us.

Any advice in this publication is not intended or written by Marine Accounts to be used by a client or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party matters herein.