All information contained within this section has been derived and interpreted by me using sources from HMRC’s website. I have listed all sources for you to use in your own research at the bottom of this page.
- Personal taxation will generally fall into two areas: Income Tax and Capital Gains Tax (CGT).
- But which do you need to pay if you have invested in Cryptocurrencies?
- That depends on if you are ‘Trading’ or ‘Investing’.
It will ultimately be determined by HMRC as to whether you owe them Income Tax and/or CGT after they have reviewed you ‘Self Assessment’.
Income Tax applies to earned income generated over an individual’s Personal Allowance.
The Personal Allowance is a bracket of income that any person is permitted to earn up to before then being required to pay Income Tax on any amount in excess of the bracket.
In the UK this currently stands at £11,500.00 for tax year 2017/18 and £11,850.00 for tax year 2018/19. The tax Year starts on 6th April and ends on the 5th April each year.
Any income earned under £11,500 is free from tax.
Income Tax is owed on profits derived from trading activities.
For example; if you are actively trading currency positions on a regular basis daily, weekly and possibly even monthly, HMRC will claim that you owe Income Tax on profits earned.
HMRC carry out a test on your activities to identify whether it constitutes Trading or Investing. This test is called ‘The Badges of Trade’.
It is a series of ‘questions and what if scenarios’ that culminates in an overall result that is interpreted by HMRC. This test will apply and be undertaken when you complete your Self Assessment.
The result will then be combined with your other income sources to determine what rate of tax applies to you both, overall and specifically to your Cryptocurrency profits.
UK Income Tax Rates (2017/18)
- Basic Rate Tax Payer – Earning between £1 and £33,500 per annum pays – 20% Tax.
- Higher Rate Tax Payer – earning between £33,501 and £150,000 per annum pays – 40% Tax.
- Additional Tax payer – Earning over £150,000 per annum pays – 45% Tax.
Capital Gains Tax (CGT)
If it is deemed that you do not owe Income Tax on your gains then it is likely that you will owe CGT.
Personal Allowance (£11,500) applies to earned income. In the same vein Capital Gains Allowance applies to CGT.
The Capital Gains Allowance currently stands at £11,300 for tax year 2017/18 and will increase to £11,800 in tax year 2018/19.
This means that any gain made within this bracket is free from tax.
Any amount earned in excess of the Capital Gains Allowance will incur charges based on what rate of Income Tax you owe.
- For Basic rate Tax Payers – CGT is 10%.
- For Higher rate and Additional Rate Tax Payers – 20%.
Note: It is worth highlighting that unlike Equity/Stocks & Shares investments, Capital Gains made on Cryptocurrency Trading and/or Investing that is in excess of the Capital Gains Allowance (£11,300) must be declared within your Self Assessment.
This differs from Equity/Stocks & Shares investments in that tax only needs to be declared once the gains that are in excess of the Capital Gains Allowance are converted back into Sterling/FIAT.
HMRC’s view regarding currency gains is that it is already in its final/spendable format, meaning that you can immediately benefit from its growth.
I will cover this area in some more detail later on and also make reference to HMRC’s official statements regarding this.
CGT is chargeable on Foreign Currency (Cryptocurrency). However, CGT is not chargeable on Foreign Currency held in Foreign Accounts.
Question – Is a Cryptocurrency Wallet a foreign Account?
This level of classification is still yet to be defined by HMRC and therefore is still open to debate.
It is however, highly unlikely that HMRC would rule in favour of those claiming that their Wallet is a ‘true’ Foreign Currency Account.
Both Income Tax and CGT
Most Cryptocurrency investors that are experienced will probably fall into this bracket. It is likely that at some point you will have both invested and traded in the eyes of HMRC.
As can be identified from the information above, there is likely to be more favorable treatment of your currency gains if CGT is liable as opposed to Income tax. The simple reason being, that you probably have a job and earn an income which makes full or at least partial use of your Personal Allowance.
Ultimately HMRC will determine what tax you owe based on what is submitted in your Tax Self Assessment.
It might be worthwhile taking some time to assess the pro’s and con’s associated with each trading style.
Profit, Loss, Costs and Gambling
Typically, HMRC will permit profits to be offset against losses.
Specifically regarding Cryptocurrency trading and/or investment this is not yet clear and HMRC will assess each person on a case by case basis.
The key point to note here is that it is just as important to make HMRC aware of the losses that you have incurred as well as the profits. Otherwise, they can only assume that you have only profited from all trades and/or investments and will tax you on all profits irrespective of losses.
In addition you might be permitted to offset some of your costs against profits.
Did you pay an exchange rate fee? Did you pay a dealing cost, purchase price? Were any costs involved for transferring the funds?
Make sure to detail these within any Self Assessment submitted for HMRC to potentially give consideration to.
Due to the highly speculative and volatile nature of Cryptocurrency there is the potential that HMRC may rule that investing and/or trading it might be considered gambling.
This would mean under UK Tax Law that all proceeds are free from tax.
Again, it important to note that this is still being worked out by HMRC and no formal framework for Cryptocurrency taxation has been released.
Cryptocurrency to Cryptocurrency
Trading one Cryptocurrency for another might typically fall into the realm of a Traders investing strategy. However, it does also form part of an Investors strategy.
The main difference between the classifications and how HMRC treat the investment for tax purposes is typically based on the time invested, as described above.
The reason I choose to highlight this point again is to illustrate a ‘test’ that HMRC use when assessing gains/conversions made.
Let’s look at a quick example to illustrate the point – does the below example of investing also involve Trading?
- On the 1st January 2017 you buy some Bitcoin in order to buy an Alt-coin.
- To do this you will have used some Sterling/FIAT to buy the Bitcoin.
- You will then have to use the Bitcoin to purchase the Alt-coin.
- You now hold the Alt-coin until 1st June 2017. It has grown in value.
- If the gain exceeds the Capital Gains Allowance then this means that potential CGT is due once you have submitted your Self Assessment.
In answer to the above question, technically yes, the above example does involve Trading. The conversion from Bitcoin to Alt-coins.
Cryptocurrency traded to Cryptocurrency in what might be considered a short time frame is Trading.
However, HMRC view the above not as Trading in the sense that has been discussed so far, but instead a ‘barter transaction’. Essentially a means to acquire one asset using another.
In these circumstances the value of gains and losses made are based on the increase or decrease associated with the initial and final currency, such as Sterling/FIAT and not the barter currency, such as Bitcoin.
A longer description with more examples are listed on HMRC’s website. I have linked to this below in the Sources section.
Cryptocurrency – is it really a Currency?
A common misconception is that tax will only apply once you have converted the Cryptocurrency back to FIAT/Sterling.
This is instead what happens when an investor is dealing in Equities/Shares.
A reason for this difference is because it is not possible, or at least highly unlikely, that you could walk into a Lambourgini dealership and purchase a Lambo with Apple Shares.
Whereas, the dealership may accept Bitcoin, Ethereum, or Alt-coin’s as these are ‘Currencies’.
It is easy to forget this simple classification from an investor’s point of view since your motives will typically be founded upon a belief that it is the Company/Team/Idea that you are investing in, much like an Equity, and not the currency as such.
HMRC will, at some stage, release more specific rules and guidance related to Cryptocurrency that will further clear up the grey area we are now faced with.
Below I have linked the HMRC Rules and Guidance associated with the terms and assessment above.