Crypto-Currency & Bitcoin Tax Implications

by | Mar 21, 2021 | Capital Gains Tax, Personal Tax, Self-Assessment Tax

With Bitcoin and cryptocurrency featuring more prominently in the news of late, people are inevitably curious to understand more about these investments and specifically the tax consequences.

One common misconception is that profits arising as a result of cryptoassets are tax-free. However, just like other assets, cryptocurrency transactions are subject UK tax treatment. So, what exactly are the tax implications?

What tax are my bitcoin/cryptocurrency profits subject to?

Assuming that an individual or business is UK based, then taxes are due on cryto profits, as outlined in the HMRC guidance documents issued in 2019. The guidance document on cryptoassets for individuals, clearly outlines that profits gained from buying and selling ‘exchange tokens’ (such as Bitcoin) are subject to tax.

The rules in summary:

– Any individual buying and selling Bitcoin is likely to be subject to UK CGT for any profits made.

– Individuals trading in crypocurrency may be liable to Income Tax on their profits as they take the form of trading income. However, HMRC expects that this is only likely to apply in exceptional circumstances as few individuals would be buying/selling cryptoassets such frequency, level of organisation and sophistication that the activity amounts to a financial trade.

– Employees or consultants receiving cryptoassets as non-cash payment for employment may be subject to Income Tax and National Insurance Contributions (NIC) as they would with cash payments.

Ultimately, most individuals who are buying/selling cryptoassets are likely to fall within the area of Capital Gains Tax as opposed to Income Tax.

Income Tax and Bitcoin

As stated above, if you are paid in the form of cryptoassets by your employer, this must be accounted for as earnings and will be subject to Income Tax and NIC based on the total amount received.

As Bitcoin and other cryptoassets are considered ‘readily convertible assets’, the tax obligation lies with the employer in the first instance, in much the same way as withholding taxes on a cash salary.

On the other hand, if you are a self-employed consultant, who is paid in Bitcoin for services provided, the income tax and NIC responsibly lies with the individual and should be reported through annual self-assessment tax return.

Declaring Bitcoin or Cryptoasset sales on a tax return

This aspect is heavily dependent on your individual circumstances but in general, as a UK tax resident, if you make gains above your CGT annual exemption, this needs to be reported and CGT payed via self-assessment tax return.

If the gain falls within your CGT annual exemption, you may still need to report the gains if the amount is more than four times the annual exemption. You would also need to report the gains if you have other capital gains or losses.

It is worth bearing in mind that HMRC receives information direct from UK crypto exchanges, therefore if you do not disclose transactions as you should, there is a risk of an HMRC enquiry and potential penalty.

HMRC is also focussed on ensuring that tax due on cryptocurreny transactions are declared by working with their international partners. Currently the Joint Chiefs of Global Tax Enforcement comprising Australia, Canada, the Netherlands, USA and the UK share details on the use of cryptoassets and it is envisaged that there will be more global collaboration in future in an attempt to tackle tax crime.

It is therefore entirely possible that there will be an increase in the number of HMRC enquiries on those who buy/sell cryptoassets.

If you do make an error or omission elating to your Bitcoin or cryptoasset sales, it always in your best interest to make a voluntary disclosure to HMRC to address the issue as opposed to waiting for HMRC to contact you. If a financial penalty is due, it is likely to be lower with a more limited timeframe on how far back the disclosure extends.

How can we help?

As a developing area of tax, you may be unsure as to whether your cryptoasset profits should be included on your annual return, or you may have uncertainty over undeclared historic profits or gains. If this is the case, please get in touch with the Kingston Burrowes team who have extensive personal tax experience and will always be happy to advise on the best course of action.