As the world of trading continues to evolve, the world of tax evolves with it. Cryptocurrency has gained significant traction in recent years, with an estimated 3 million Britons holding cryptocurrency. HMRC have grown wise to this and are growing increasingly stringent in their approach to taxation on these digital assets.
If you’ve bought, sold, or traded cryptocurrencies, there’s a good chance that HMRC know about it. They have even begun sending letters to people who have not declared everything correctly, warning them that they may have to report disposal of cryptoassets to HMRC and pay Capital Gains Tax on any gains that they make. These letters also warn that Income Tax and National Insurance contributions may be due by those who generated any income from cryptoassets. HMRC are paying particular attention to those who hold significant cryptocurrency assets, as they are aware that an increase in cryptocurrency prices can lead to substantial capital gains—taxable under UK law.
Why is Cryptocurrency Taxable in the UK?
HMRC treat cryptocurrency as an asset subject to Capital Gains Tax (CGT) for most transactions and Income Tax for activities such as mining and staking. For example, if you sell or exchange crypto and make a profit, the gain is subject to Capital Gains Tax if it exceeds the annual CGT allowance of £3,000. Meanwhile, activities like staking or receiving crypto as payment are categorized as income, with tax applied according to the UK’s income tax brackets.
The precise tax owed varies depending on the type of transaction and the taxpayer’s personal income bracket. For Capital Gains Tax, rates are 18% for basic-rate taxpayers and 24% for those in higher tax brackets. Income Tax applies at the individual’s income tax rate, which could be 20%, 40%, or 45%.
What if you haven’t reported your cryptocurrency earnings?
Ignoring the tax implications of cryptocurrency transactions can lead to serious consequences. HMRC have made it clear that they will not tolerate tax evasion. If they discover unreported gains, you could face substantial penalties, which might include back taxes, interest on unpaid taxes, and additional fines. To mitigate any risks of falling foul of the tax system, it’s crucial to maintain meticulous records of all your cryptocurrency transactions. Documenting the dates of transactions, the amounts involved, and the price of cryptocurrencies will make it easier to calculate your gains and losses. Moreover, using tax software designed for cryptocurrency can streamline the process and ensure compliance with UK tax regulations. If you’re unsure about your tax obligations, we recommend that you speak to a tax advisor for professional, tailored advice.
Staying informed and compliant with UK tax laws is the best way to engage with the world of cryptocurrency. If you are trading crypto, take proactive steps: understand your tax obligations and always report your earnings accurately to the HMRC. That way, you can reap the rewards of investing in digital currency wisely without the stress of potentially costly inquiries.
Megan Tarr is our guest writer on taxation topics and she expounds on a wide variety of tax issues.
