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Do you pay tax on Bitcoins?

Do you pay taxes on bitcoin?
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    In recent months, cryptocurrency has been the talk of the town. Its popularity has taken over the world amid the Covid pandemic. Several entrepreneurs and celebrities across the globe, like Elon Musk, Mike Tyson and Kanye West have already invested in cryptocurrencies.

    The rapid growth in cryptocurrency investments has also attracted HMRC’s interest. They are eager to ensure that everyone who invests in crypto assets pays the correct amount of taxes. It is critical for anyone who invests in crypto assets to structure their tax affairs effectively, in a tax-efficient manner, while maintaining compliance with HMRC. This will help you avoid fines and penalties, as well as unexpected tax bills.

    There are various misunderstandings about crypto asset taxation in the UK, one of which is that crypto assets are exempt from UK taxation because they are viewed as a lottery. That is not the case!  We’ll look at what crypto assets such as Bitcoins are and how they’re taxed in the UK.

    What is UK tax treatment on Bitcoins?

    Cryptocurrencies remain in a digital wallet that may be accessed or retrieved via apps or websites. There is no government or central bank to oversee the system or intervene if it fails.

    Every transaction is noted and illustrated on a public ledger, or blockchain, that uses a digital system that records transaction details in numerous locations simultaneously which is known as distributed ledger technology (DLT). 

    HMRC doesn’t consider crypto assets to be money or currency. Instead, they have divided cryptocurrency into four groups:

    1. Exchange tokens – this is meant to be used as a means of payment. However, it is now becoming very popular as an investment. Bitcoin is an example of an exchange token.

    2. Utility tokens – these offer access to certain commodities or services on a platform, usually through distributed ledger technology (DLT).

    3. Security tokens – these provide the owner with a specific right or interest in a business, such as ownership, repayment of a specified sum of money, or the right to a portion of future profits.

    4. Stable coins – these are pegged to the value of other assets (for example, US dollars/gold) and hence considered less volatile.

    HMRC’s position varies depending on whether an individual or a corporation holds cryptocurrencies (crypto assets).

    If you are an individual, your profits will be taxed as income or capital gains, depending on whether you are trading or investing. Unless there is proof of trading, disposal proceeds are generally taxed as capital gains.

    Are you trading or investing in Bitcoins?

    It’s possible that you’ll be classified as trading if you’re actively mining BTC or if you’re a dealer who makes multiple trades.

    You are investing if you buy and hold, then sell according to market conditions, and your earnings or losses will be taxed as capital.

    If your gains on disposal are taxed as capital, you are eligible for tax relief on the direct costs of buying and selling the crypto assets. You may also offset your Capital Gains tax-free allowance (£12,300 for 2022/2023 if not used elsewhere.

    For example, suppose you purchase an asset for £14,000 with Bitcoins which you bought for £10,000. Unless the money made on Bitcoins (£4,000) is under your tax-free allowance of £12,300, you must pay either 10% or 20% Capital Gains Tax (CGT), depending on the level of your taxable income.

    When a profit has been made on the disposal of crypto assets, CGT will be due, which has to be reported on your Self Assessment tax return. As HMRC receives information for crypto exchanges, you need to ensure that you disclose your profits correctly. Failure to report gains might result in HMRC penalties.

    Do I have to pay tax on Bitcoins if I don’t trade them?

    No. What matters to HMRC is the profit you make when you sell your crypto assets, not the amount you invest. There is no tax due if there has been no disposal. However, if you exchange Bitcoins for another cryptocurrency (for example, Bitcoin to Ethereum), this is considered disposal, and you will have to pay CGT.

    What if I make a loss?

    As per HMRC, cryptocurrency capital losses can be used to offset tax liabilities. If you sell crypto for a loss, you can deduct the loss from your overall capital gain.

    Record-keeping of Bitcoins

    Crypto asset exchanges may only maintain records of transactions for a short amount of time.

    Therefore, you must consequently keep your records for each crypto asset transaction, which must include the following information:

    1. Type of crypto asset

    2. Transaction dates

    3. Nature of transaction (buying/selling)

    4. Number of units

    5. Transaction value (in GBP as at the date of the transaction)

    6. Bank statements

    Ways to minimise Bitcoin tax

    1. Make the most of the CGT exemption – the CGT allowance you receive every year (£12,300 for 2022/2023) cannot be carried forward into the next tax year. Hence it is best to use this tax-free allowance each year to avoid a significant CGT bill in the future.
    2. Make use of losses – if you have made any losses in the tax year, this can be used to offset any gains. HMRC must be notified of failures within four years of the end of the tax year in which they happened.
    3. Transfer assets to your civil partner or spouse – assets can be transferred between husband and wife or civil partners to take advantage of both annual CGT allowances.
    4. Contribute to pensions – the tax on a capital gain can be reduced from 20% to 10% by contributing to a pension plan. It increases the upper limit of an individual’s income tax bracket by the gross contribution amount.

    Our team of chartered tax advisers has extensive experience in handling all types of crypto-related transactions and can help you navigate the complex world of cryptocurrency taxation, contact us today.

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