Cryptocurrency is a relatively new thing compared to other income you’ll be paying taxes on as a business owner or employee. Because of its comparative newness, there isn’t a huge amount of understanding out there as to how to manage the tax impact.
HMRC states that individuals should check if they need to pay tax when they sell or receive cryptoassets. We’re seeing more of our clients buying and selling cryptocurrency, especially in the tech space. We’ve written this blog to shed a light on some of the most important factors to consider when you’re trading crypto, including:
- Whether you’ll need to pay capital gains tax
- Whether you’ll need to pay income tax or national insurance
- Or if you’ll need to pay corporation tax
- How to keep a record of your crypto income
The reason it’s so important to look at all these areas is because there’s no one rule for all when it comes to the tax position on cryptocurrency. Your tax liability will depend on your involvement in and level of activity.
If you are selling or disposing of cryptoassets, you will need to pay capital gains tax
Despite Elon Musk’s recent crypto takedown, many cryptocurrency investors are making big gains.
A capital gain is the profit earned on the sale of an asset which has increased in value over the period you held it, and HMRC views cryptocurrency as a tangible asset making it subject to HMRC. So, your capital gain is your crypto profit – the difference between the cost of your cryptocurrency and the amount you sold it for.
You will be subject to capital gains when you sell or ‘dispose’ of cryptoassets the following ways:
- Selling cryptoassets for money
- Exchanging one type of cryptoasset for another
- Using cryptoassets to pay for goods or service
- Gifting away cryptoassets to someone else (with the exception of your spouse or partner)
It’s important to note that Capital Gains Tax will only be due when there are profits to tax and a disposal has been made.
If you’re considered to be trading in cryptocurrencies, you may be subject to income tax
The majority of individuals buying and selling cryptoassets are more likely to be within the scope of capital gains tax rather than income tax.
That being said, if you are buying and selling cryptoassets at such a high frequency and level of sophistication that the activity amounts to a financial trade – you will be subject to income tax. We would expect you to spend a significant amount of your time keeping track of what is happening in the market and managing your trades for this to apply.
HMRC also states the following instances may result in an income tax and national insurance liability:
- When you receive rewards from mining, staking and/or airdrops – such as receiving free (or below market value) cryptoassets and/or a share in future transaction fees.
- When you receive cryptoassets as a result of your employment – note that if you are a self employed consultant, and you receive cryptocurrency for your consultancy services you will be responsible for reporting and paying your income tax and National insurance contributions on your self assessment tax return.
If you are conducting cryptocurrency activity through your company, you may be subject to corporation tax
For companies, profits (or losses) from cryptocurrency will form part of the business trading profits instead of being a chargeable gain. You are likely to be subject to corporation tax in these instances:
- Crypto activity is conducted through a company.
- The business sells goods or services in exchange for cryptoassets
- The company buys and sells cryptoassets.
- Cryptoassets are exchanged for other assets, for example, other types of cryptoassets.
- The level of the company activity in cryptoassets could be deemed to be trading
Treat cryptocurrency like the rest of your financial information – keep good records
As with all your financial transactions, it’s in your best interests to keep a record of your cryptocurrency activity. You may be subject to tax, but you want to be paying the right amount – and you’ll want proof of your transactions if an enquiry is ever raised by HMRC.
Here are some helpful tips from HMRC on what records to keep:
- Retain cold and hot wallets as they have the private and public keys. Cryptoassets are digital assets and therefore all records in a wallet should show balances and transactions. These can either be in full or via reference to a public blockchain (ledger).
- Other records of transactions and balances, such as downloads from the wallet activity from a cryptoassets exchange. Most exchanges will allow you to download CSV files of the ‘trading’ activity. A separate email address could be set up to email across the files. Be careful that no security details are included within the information emailed across.
- Use a cryptocurrency portfolio tracking app such as Coin Tracker, Blockfolio or Crypto Compare, for example, which can track transactions across a number of exchanges.
- Consider taking screenshots of the ‘trading’ activity.
- Bank statements showing the flow of fiat currency (Government backed currency, e.g. Sterling) into and out of cryptocurrency. It would be preferable to have all activity going through one designated bank account.
Can I use Xero to keep track of my cryptoassets?
Xero doesn’t currently have cryptoassets on its list of available currencies. There are third party providers that can translate your digital asset data to accounting data which integrate with Xero. That way you can avoid having to keep track of the accounting impact via manual workarounds.
The best thing to do if you’re unsure about your situation… speak to someone about your situation!
We’re here to help get you out of a mess if you’ve been dealing in cryptocurrency and you’re not sure what you need to do tax wise. Pop a message in our contact questionnaire and we’ll help you figure out and record the specifics, and make sure you’re paying the right amount in tax!