Just before the start of this new 2021/22-tax year, HMRC announced changes to how crypto assets - those funds held in or earned through cryptocurrencies - are taxed.
As a relatively new concept, there is a great deal of confusion about the legality and declaration requirements around crypto assets, so the SAS team has summarised how this works and what the changes are!
What are the Tax Rules Around Cryptocurrencies?
HMRC has a taxation guide with tax manuals relating to individuals and businesses. However, it's worth noting that there remain queries and vague trading areas, which continue to require clarification.
The new rules announced at the end of March have come under fire for failing to answer some of the critical questions and introduce only minor adjustments to the tax regime.
Some of the principal rules are as follows:
- Exchange tokens, including bitcoin and other cryptocurrencies, are considered assets, and profits made from selling or trading these assets are taxable.
- Individuals who buy cryptocurrencies will be subject to Capital Gains Tax on profits they have made.
- Regular traders may be eligible to pay income tax on their trading income.
- Crypto assets received as a payment for a service or employment must be liable for income tax and National Insurance contributions in the same way as if they were paid in cash.
With these new announcements, around 95% of the tax manual is unchanged. The changes are mainly related to the gambling status of cryptocurrencies or transferring coins between different ledgers.
Understanding the New Crypto Asset Tax Rules from 2021
Here is a rundown of the new regulations:
Staking a Claim
Staking means that the owner of cryptocurrencies stakes a proportion of their assets to enable a new blockchain to be created. They then earn a profit on that stake.
Earnings made through staking will now be treated as miscellaneous income and should be included on tax returns.
Cryptocurrency Ledger Transfers
Another area of confusion exists when cryptocurrencies are transferred between ledgers - and how to value that transfer. HMRC states that the valuation is based on the cost of the crypto assets when the owner moved them.
This matters for individuals subject to Capital Gains Tax since the cost is carried forward and will be used as a basis to calculate the value of future disposals.
Taxes on Cryptocurrency Investments
Buying or trading cryptocurrencies is widely debated - does it constitute a form of gambling, or is it an investment in an alternative currency?
HMRC guidelines have confirmed that these activities are treated as an investment and do not fall under the remit of gambling for taxation purposes.
This is another seemingly minor clarification that could have a significant impact on crypto traders.
Gambling income is not liable for income tax charges or CGT, and so were HMRC to have recognised cryptocurrency trades as a form of gambling, it would have stood to lose a substantial amount of tax revenue.
Capital Gains Tax on Crypto Asset Profits
For some time, there has also been contention about whether profits earned from cryptocurrency trading should be liable for income tax or charged at CGT rates.
Under the current rules, such assets are liable for CGT, based on a similar system to profits from trading stocks and shares.
Individuals who make regular, frequent trades and earn personal income from the business can, in particular cases, be liable for income tax instead.
The differentiating factor here is that a trader of crypto assets isn't likely to have chosen this line of work solely for tax efficiencies, so there will be few circumstances where a change in tax bases will apply.
Activities where traders need to pay income tax and National Insurance include:
- Being paid in cryptocurrencies for employment.
- Making earnings through mining, transaction confirmation or airdrops.
Ongoing Changes to Cryptocurrency UK Taxes
In most scenarios, crypto assets bought or sold are treated much in the same way as shares. They tend to be collated into standard asset groups, with disposals deducted from that category.
The challenge with managing tax liabilities on cryptocurrency trading is that, as yet, there isn't a regulatory framework to give certainty about how to deal with transactions or trading that falls outside of the general guidance.
HMRC will likely continue to issue adjustments to their cryptocurrency tax manuals as the industry develops and further consideration is given to the correct tax treatment of profits and gains arising.
In the meantime, if you need professional assistance with ensuring cryptocurrency gains are declared accurately, please contact the SAS Accounting team for further guidance.