Cryptocurrencies recently joined the financial markets and have since raked in billions of dollars in revenues. Naturally, governments would like a stake in them through tax, the UK and USA government are no exceptions.
In 2014, the HM Revenue and Customs (HMRC) released a brief setting out tax treatments on cryptocurrencies. Later in December 2018, it published a policy paper detailing its view of crypto assets for individuals.
While the 2018 document is more of an update to the older brief, with a few changes considering the crypto sector is constantly developing, the nature of Income Tax (IT) and Capital Gains Tax (CGT) remain the same in both publications.
HMRC does not expressly define cryptocurrencies. Tax treatment is dependent on what a holder does with a given asset rather than how it is defined. If used for trading, an asset attracts an Income Tax liability while when treated as an investment, it attracts Capital Gains Tax liability.
As such, crypto taxation for individuals fall under either IT or CGT. Check with https://www.harvex.io/bitcoin-accounting/ for a top guide on accounting crypto.
The exception is on cryptocurrencies passed on as inheritance which are defined as property and are taxed under inheritance tax.
Income Tax is imposed on incomes above the defined Personal Allowance. Anything below a given Personal Allowance is exempt from taxation.
Mining, Airdrops, and salaries account for Income Tax in similar ways as financial trading. Whether a crypto activity, such as if you earn bitcoin, can be considered financial trading or not will be considered on a case by case basis. However, buying and selling of cryptocurrencies would generally constitute trading.
Cryptos given to miners for adding new blocks to the blockchain or verifying transactions are considered as earning, so are Airdrops awarded for advertising and marketing. As such, digital assets received in the manner of earning or salary are further subject to National Insurance Contributions.
Capital Gains Tax
Capital Gains Tax is tax liability realized from disposal of crypto assets previously held as an investment. Using crypto to pay for goods and services, selling for money, giving to another person or exchanging for another crypto constitute disposal. Capital Gain is calculated using the buying price against the disposal price. A positive difference constitutes a gain and it is this specific gain that is subjected to CGT.
Also, when disposing of earnings, CGT may be imposed.
Pooling in CGT
Earlier, Capital Gains Tax had to be painstakingly recorded and calculated for each and every purchase and sale. The 2018 policy, however, has a simplified calculation model derived from the pooling of crypto assets. A particular asset is pooled and attached a “pooled allowable cost” which increases as more assets are pooled in or decrease as they are disposed of.
However, individuals are still required to keep and maintain records which contain entries on; Date of transaction, units transacted, type of crypto asset and value of unit transacted among other details considered necessary.
Losses Implication on both IT and CGT
Loses usually are a liability to individuals. As such, loses are not taxed. Instead, they may be used to claim relief and are usually offset against gains.
Events that lead to a 100% loss of an initial investment allows for Negligible Value Claim. This way, crypto assets are treated as disposed and re-acquired at the value stated in the claim. Loss of private keys, assets losing their worth or buying assets that turn out to be worthless triggers negligible value claim. Loss through fraud or theft, however, does not enjoy this provision.
Taxes are usually imposed on wages, savings, and pensions, which have centralized management systems and are directly deducted as PAYE. Self-assessment thus is a system HMRC uses to collect income tax from business owners and persons benefiting from decentralized transactions such as cryptocurrencies.
UK citizens have the obligation to make yearly reports to HMRC declaring their earnings and the sources of the earnings. Individuals can fill and submit filed reports online or download forms and deliver the report via post. Individuals can also undertake the filing by themselves or enlist the help of a professional.
In either case, it is important to note all legitimate deductions and allowances to be factored when calculating tax liabilities. All loses should also be reported. Failure to do so will lead HMRC to interpret the report as all gains consequently leading to unmerited high tax liabilities.