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It’s time we talked about cryptoassets.
Unless you’ve been living under a rock for the past few years (and even then, Garry Vee’s probably tried to sell you an NFT), you’ve no doubt heard the terms ‘cryptocurrency’ and ‘NFTs’.
That’s because these cryptoassets are all the rage right now and, as a result, are becoming increasingly commonplace in the world of online finance.
Currently, 6.1% of adult Brits own cryptocurrency, with a further 3.3% planning to own an NFT in the future. While this suggests cryptoassets are still in their infancy, investments are increasing at a rapid rate - UK investments in cryptocurrency, for example, have increased 108% since 2018.
With all of this in mind, you may be tempted to dip your toe into cryptoassets - and providing you conduct proper research, there’s no reason why you shouldn’t.
Whether you’re mining or trading, though, it’s vital you’re aware of the tax implications of cryptoassets before you dive into investment - and that’s exactly what we’re breaking down here.
What are cryptoassets?
A cryptoasset is a term used to describe a digital investment in cryptocurrencies or non-fungible tokens (NFTs).
First popularised by the emergence of Bitcoin in 2009, there are now 100,000 active cryptocurrencies available for buyers to invest in across the globe.
The appeal? These assets are owned on the blockchain and therefore decentralised, which boasts a range of benefits, including:
How are cryptoassets taxed in the UK?
This, combined with the notorious volatility of the markets, has made cryptoasset taxation a hotbed of conversation.
HMRC has actually been offering guidance on cryptotax as far back as 2014, with more thorough advice and guidelines published in their Cryptoassets Manual earlier this year.
Due to the relative infancy of these assets (plus complications tied to the decentralisation of the blockchain), there’s currently no specific legislation on cryptoassets in the UK.
As a result, cryptoasset owners must apply existing taxation rules tied to physical assets.
Capital Gains Tax
The first UK tax that cryptoasset holders may be subject to is Capital Gains Tax - this is dependent on whether the owner is trading or investing.
HMRC’s ??Cryptoassets Manual suggests that cryptoassets are to be considered personal investments and, as a result, are subject to Capital Gains Tax. This would be payable on any profits that exceeded the annual exemption.
If investors were to sell their cryptoasset for a loss, this could be offset against other gains to minimise capital gain.
Remember: the first £12,300 of profit is tax-free. If you pay a high rate of Income Tax, you’ll then pay a flat rate of 20% Capital Gains Tax on all profits thereafter.
On the other side of the coin, those paying the basic rate of Income Tax will be charged Capital Gains Tax based on their earnings.
This is calculated by deducting your tax-free allowance from your total taxable income, with Capital Gains Tax charged to this total. This is at a rate of 10% on gains within the basic income bracket, and 20% on all gains thereafter.
Cryptoasset holders buying and selling at a certain rate are likely to be considered traders by HMRC, meaning they'd be subject to Income Tax as opposed to Capital Gains Tax.
HMRC doesn’t objectively define the point at which a cryptoasset owner is trading - instead, they use their ‘badges of trade’ tests to reach a subjective decision.
As a rule of thumb, though, owners yield farming, mining and validating transactions are likely to be viewed as cryptotraders by HMRC.
The amount of Income Tax you’ll pay is subject to your rate of income. Bands range from 0% to 45% in England, Wales and Northern Ireland:
What power does HMRC hold?
As we’ve already touched on, the decentralisation of cryptoassets can cause complications regarding where exactly these assets are deemed to be located, having huge tax ramifications.
HMRC’s ??Cryptoassets Manual implies that they consider cryptoassets to be located wherever the beneficiary resides, enabling them to apply UK taxation to cryptoassets owned by UK citizens.
Another challenge created by crypto’s decentralisation is what legal right HMRC has to data and information gathering.
The Cryptoassets Manual goes some way towards addressing these challenges, noting that HMRC can request information from crypto exchanges under various bills, including:
Based on a freedom of information request, we also know that HMRC is confirmed to use powers granted by parliament to:
As cryptoassets continue to become more mainstream and their popularity as digital investments continues to grow, we expect the UK Government’s guidance to become a legislative framework sooner rather than later.
With all this in mind, those holding gains on crytomarkets are best to consult financial experts to make sure they’re putting the right steps in place to get the very most out of these investments.