What is cryptocurrency?
Cryptocurrency is a digital currency that made its first appearance in 2009 in the form of Bitcoin. Since then, other forms of cryptocurrency have been introduced like Ripple in 2012 and Ethereum in 2015. This virtual currency is based on blockchain technology. Cryptocurrency is not managed by a central authority that maintains its value. It is the users of cryptocurrency who perform this task through the internet. Though regular services and goods can be bought using cryptocurrency mostly it is used for investment purposes.
Also called tokens, crypto assets can be electronically stored, transferred, and traded. Different types of crypto assets work in different ways. Stablecoins, security tokens, exchange tokens, and utility tokens are some examples of crypto assets.
These are cryptocurrencies that are designed to maintain a stable value relative to another asset, such as the US dollar or gold. e,g USDT
These are tokens that represent ownership or investment in a real-world asset, such as a company or property. For instance, tZero is a blockchain platform that facilitates the trading of security tokens representing ownership in a company.
An exchange token is a type of cryptocurrency that is issued by a cryptocurrency exchange, which can be used within the exchange’s platform for trading, transaction fees, or other utilities. e.g Binance token.
A utility token is a type of cryptocurrency that is designed to be used as a form of payment for a specific product or service within a particular ecosystem.e.g For example, the BAT (Basic Attention Token) is a utility token used within the Brave browser to reward users for viewing advertisements.
Is Cryptocurrency Taxable in the UK?
Yes, it is. If you live in the UK and own Crypto assets then you will have to pay tax on your crypto assets ‘profits, if they exceed the limit of the annual tax-free allowance.
Tax treatment of crypto assets:
According to HMRC, the tax treatment of crypto assets depends on the token’s use and nature and has nothing to do with its definition. Cryptocurrency is not considered currency or money by the HMRC. For tax purposes, crypto assets are treated like shares.
HMRC’s Rules for Tax Treatment of Crypto Currency For Individuals
Individuals who have cryptocurrency or crypto assets may have to pay,
- Income tax
- Capital gain tax
As an individual, you are liable to pay Income tax on your cryptocurrency if you received it from:
As a non-cash payment this income is considered “money’s worth” and is taxable. In such a case, an individual is liable to pay income tax and national insurance contributions on the value of his assets.
Mining is the process through which new transactions are verified and new coins are generated. Income tax applies on the awarded coins if the mining activity does not equal a trade.
It is the process that helps the participants verify theircryptocurrencies. Staking is just like putting your savings in a savings account with a high yield. Income tax applies on the tokens awarded through staking if this activity does not equal a trade
It is the process of delivering free tokens as a marketing or promotional strategy. Income tax in the case of airdrops applies only if the air-dropped tokens are delivered for an exchange of a service or an expectation of service.
Income tax losses
According to HMRC, an individual may be able to carry forward their losses if the profits they gained from their activities come under miscellaneous income.
Capital Gains Tax:
Tokens are digital and thus are not tangible. But according to HMRC, they can be regarded as chargeable assets for the capital gains tax if they fulfill the following two conditions:
- The tokens can be owned
- The value of the tokens can be realized.
HMRC regards buying and selling an individual’s token as an investment. That is why an individual has to pay capital gains tax on the gains they get through this kind of investment.
HMRC’s Rules for Tax Treatment of Crypto Currency For Companies
According to HMRC, tax applies to companies if they are involved in the exchange tokens activities which include
- Buying or selling exchange tokens
- Exchanging tokens for other assets
- Getting exchange tokens by providing services
Type of Tax:
What type of tax a company or business has to pay depends upon;
- The individuals involved in the business and
- The type of activities they are involved in
Most likely they may have to pay one or more of the following taxes:
- Income Tax
- Capital Gains Tax
- Corporation Tax
- Corporation Tax on Chargeable Gaines
- Stamp Taxes
- National Insurance Contributions
How much tax a business or a company is liable to pay depends on the following factors
- Profits and gains
- Income and expenditures
HMRC requires individuals and businesses to annually declare their income, expenditure, profits, and gains through self-assessment tax returns and company-tax returns respectively.
Partnership with Koinly
As technology-driven accountants, we use Koinly crypto tax software to simplify the complex process of calculating cryptocurrency taxes. With Koinly, we can quickly import transaction data from multiple exchanges and wallets, generate accurate tax reports, and provide valuable portfolio insights. Contact us to learn more about our expert accounting services.
In conclusion, while the world of cryptocurrency can be exciting and potentially profitable, it also comes with tax implications that must be considered. As the regulatory landscape around crypto continues to evolve, it’s important to stay informed and seek out the guidance of a qualified tax professional. By working with Fusion Accountants, you can ensure that your crypto transactions are properly reported and minimize your tax liability. Don’t let confusion and uncertainty about crypto taxes hold you back from exploring this exciting new frontier. Contact us today to learn more about how we can help you navigate the complex world of crypto taxes.