If you are someone that’s embarking on a journey into cryptocurrencies and investing in burgeoning crypto assets, it’s important to understand your tax obligations as a crypto trader. Cryptocurrency is still regarded as a relatively new asset in monetary terms and therefore the regulations regarding its taxation are still being somewhat moulded, not least in the UK.
Although uncertainty continues in India regarding cryptocurrency legislation, British crypto enthusiasts are running out of time before the deadline for self-assessment tax returns covering the 2019/20 financial year. HM Revenue and Customs (HMRC) has outlined substantial guidance for cryptocurrency investors wondering if and how much they need to pay tax on their assets.
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First and foremost, HMRC has categorised cryptocurrency assets into three separate fields:
Exchange tokens
Exchange tokens are those distributed on behalf of cryptocurrency exchanges themselves and have increasingly added value to users. First and foremost, they are offered as a financial incentive to ‘market makers’ i.e. cryptocurrency traders offering prices for other users to buy or sell instead of taking prices offered. Secondly, crypto traders executing buy and sell orders on an exchange are encouraged to use exchange tokens to get a sizeable discount on their overall trading fees. Finally, some cryptocurrencies rely on exchange tokens to ‘power’ their ecosystems. Take Ethereum for example, which uses its own native exchange tokens as ‘gas’ to execute and validate orders on its blockchain.
Utility tokens
Utility tokens are cryptocurrency tokens issued by organisations, with utility use cases for the end-user. Utility tokens are most commonly dished out during an initial crowdsale, known as an initial coin offering (ICO), akin to an initial public offering (IPO) when a newly publicly listed company floats on the stock market.
Security tokens
Security tokens are rapidly going in vogue, acting as a form of investment contract, legally representing a form of ownership of a digital or physical asset. These tokens are verified and housed within a blockchain, which can either be traded at a later date for other assets or used as collateral for additional loans.
HMRC still does not consider cryptocurrency to be a form of currency or money. Instead, it deems it an ‘asset’. The vast majority of individuals store cryptocurrency as a form of personal investment. Subsequently, HMRC requires these individuals to pay capital gains tax upon the disposal (sale) of these cryptocurrency assets, rather like the sale of a second property or a company.
First and foremost, you only need to pay capital gains tax on gains worth over £12,000 during a tax year. HMRC deems the disposal of a cryptocurrency asset as selling a crypto coin in exchange for a fiat currency e.g. pound sterling or US dollar. It also describes the exchange of one cryptocurrency asset for another as a disposal, along with gifting cryptocurrency to another individual – either as a present or as a swap for goods or services.
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If you need to declare capital gains within your self-assessment tax return, you must fill in section SA108 of the return. This will allow you to allocate the number of disposals during the last tax year, the proceeds from those disposals and any allowable costs.
Those who prefer to day trade cryptocurrencies either in a crypto-crypto or fiat-crypto manner must also accept that these are both taxable events in the eyes of HMRC. Given the popularity of day trading cryptos, it’s no surprise to see a rise in the number of brokers affording industry-leading trading platforms to buy and sell cryptos, and even trade the price of cryptos using contracts for difference (CFDs). The best brokers that offer cryptocurrency trading right now are licensed and well regulated, as well as 24/7 trader support.
If you receive cryptocurrency in the form of airdrops or transaction or mining rewards, or even as a form of salary, this income is subject to income tax and national insurance contributions (NICs) as opposed to capital gains tax. You would have to notify HMRC of this income in the same way as fiat currency on your self-assessment tax return.
In the worst-case scenario that your cryptocurrency assets were rendered worthless, it is possible for you to file a negligible value claim, treating the assets as disposed of, allowing you to claim any losses with HMRC. Those who lose their private keys and subsequent access to cryptocurrency wallets can also file a negligible value claim, providing you can prove there is no likelihood of retrieving the key.
Ultimately, the onus is on anyone investing or trading in cryptocurrencies to maintain up-to-date records of every transaction they make. It may even be prudent to synchronise your cryptocurrency exchanges and trading platforms with your tax and accounting software, automating this process and saving you valuable time and money.
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