- Crypto assets are a relatively new type of asset
that have become more prevalent in recent years.
And there is a growing army of you investing
in crypto assets with a view to making a gain.
Because of its adolescents, the taxation of these
crypto assets is often confusing and unclear.
So in this video, we are going to cover
what exactly is a crypto asset
according to tax laws here in the UK,
how cryptocurrency taxation works for individuals,
how cryptocurrency taxation is determined
for non UK resident individuals,
and finally, recordkeeping and reporting to HMRC.
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According to HMRC, their official definition
of cryptocurrency is,
crypto assets that are crypto graphically
secure digital representations of value
or contractual rights that can be
transferred, stored or traded electronically.
Furthermore, HMRC in the UK identify
three types of crypto assets.
Number one are exchange tokens,
which are intended to be used as a form of payment.
There is no one person, group or asset
underpinning them at all.
The value exists based on its use
as a means of exchange or investment.
Unlike utility or security tokens, they do not provide
any rights or access to goods or services.
Number two is utility tokens,
which provide the holder with an access
to particular goods or services on a platform.
A business or a group of businesses would normally
issue the tokens and commit to accepting the tokens
as a payment for the particular goods or services
in question.
And finally, number three are security tokens,
which may provide the holder
with particular interest in a business.
For example, in the nature of debt due by the business
or a share of profits in the business.
In this video, we will be focusing on the rules
for exchange tokens, which is the category
that the popular cryptocurrency Bitcoin falls into,
and where most investors are at the moment.
Cryptocurrencies tax rules for utility tokens
and security tokens will use the same starting principles
but the final tax treatment may differ.
It is also important to remember
that this asset class is still in its adolescent stage.
So the tax treatment is under constant review
and can change very quickly.
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We'll be posting downloadable resources, tax tutorials
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If you are a private individual,
then investing in cryptocurrency, it is highly likely
that this will amount to an investment activity.
And any profits you make will be taxed as a capital gain,
which currently has preferable rates
in comparison to income tax rules here in the UK.
We've already produced a video covering capital gains tax,
which we'll leave a link in the description box below.
HMRC also recognize that there will be rare circumstances
where an individual may be trading cryptocurrencies
as a business.
In other words, as a trading activity
rather than an investment activity.
But we must point out that this would be very rare indeed.
In these circumstances,
HMRC would actually tax you under income tax rules.
Whenever you dispose of cryptocurrency,
it could give rise to a capital gain,
or it could generate a loss.
A disposal is defined as follows;
either selling the cryptocurrency for money,
exchanging one cryptocurrency for another type,
using crypto assets to pay for goods or services,
and finally, giving away cryptocurrency
to another person who isn't your spouse or civil partner.
Certain allowable costs may be deducted from proceeds
before coming to a taxable capital gain
or a capital loss that can be utilized in the future.
In addition, when it comes to the buying and selling
of crypto assets, HMRC have stated
that the section 104 pooling rules will apply.
So let's visualize this with a simplified example.
Bob purchased 10 Bitcoins for 10,000 pounds
on the 1st of January,
and this has been categorized into pool A.
Bob then purchased a further 10 Bitcoins for 15,000 pounds
on the 1st of July, which once again,
because the asset class is the same,
has been categorized in pool A.
Across both purchases,
Bob accumulated allowable costs of 5,000 pounds.
Bob then disposes of 10 Bitcoins
on the 31st of December for 100,000 pounds.
His simplified tax calculation
will look something like this.
Bob has now received 100,000 pounds
in sale proceeds for the assets, but that's not all profit
and thus not all subject to capital gains tax.
Since Bob has disposed of 50% of his holdings,
he can subtract 2,500 pounds
which is 50% of the allowable costs we mentioned earlier.
This is in line with the pooling principles
we also mentioned earlier.
We can also subtract the original purchase cost
from the total.
Now he spent a total of 25,000 pounds on Bitcoin
and is selling at 50% of that,
which makes a purchase cost allowable
in this calculation of 12,500.
Once we subtract this, we're left
with a total capital gain of 85,000 pounds.
However, Bob also has his capital gains tax allowance,
currently 12,300 pounds in the 20 to 21 tax year.
This gives both a total taxable capital gain
from the sale of his Bitcoin of 72,700 pounds.
The capital gains tax Bob will actually pay
will be from 10% up to 20% in line
with 2020/21 tax thresholds.
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Now, cryptocurrency tax rules will also depend
on your residency status for tax purposes.
If you are a UK tax resident, then you will be subject
to UK capital gains tax or in rare circumstances,
income tax on any gains or income
that you make on your cryptocurrencies.
If you are a non UK tax resident in a tax year,
then generally speaking, you will not be subject
to UK capital gains tax or income tax on any gains
or income you'll make on your cryptocurrencies.
However, there are exceptions to this rule.
As cryptocurrencies are intangible assets,
in other words, they don't have a physical form,
HMRC are currently adopting a approach of taxing
based on you, the individuals residency
rather than the location of an asset,
which is difficult to determine for cryptocurrencies.
So this is particularly important for two key reasons.
Number one, that UK tax residents cannot shield
their cryptocurrencies from UK tax by holding
the crypto wallets in another country.
And number two, non UK residents will not be subject
to UK tax on cryptocurrency transactions
just because their crypto wallet
is actually based in the UK.
This is actually a complex area of tax law
and planning and is continually evolving.
So we always advise you seek professional help
for your specific circumstances.
Finally, it's worth noting that if you hold
or gift crypto assets as part of an inheritance,
then they will be classified as property
for the purposes of inheritance tax.
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It is your responsibility as an individual
to maintain sufficient accounting records
to support your cryptocurrency transactions
in accordance with cryptocurrency tax rules here in the UK.
So your records should include the type of crypto asset,
the date of the transaction,
if they were bought or sold, the number of units,
the value of the transaction in pound sterling,
cumulative total of investment units held,
bank statements and wallet addresses if needed
for an inquiry or review, details of exchange rate used
to convert back to pound sterling.
Any gains or losses from cryptocurrencies will be reported
on your self-assessment return.
And you will need to maintain these records
for at least five years
following the 31st of January submission deadline.
It is also important to remember
that although some cryptocurrency platforms
and exchanges will maintain records,
they may not maintain those records
for a sufficient duration of time
and the ultimate responsibility lies with you,
the individual to comply
with cryptocurrency tax rules on record keeping.
As an individual investor,
you will usually report any gain arising
from your cryptocurrency investing or trading
via a self-assessment tax return
by completing the capital gains tax section
along with any sections relevant to other sources of income.
Even in the rare circumstance that HMRC consider
your cryptocurrency activity to be a trade,
you would still report via the self-assessment return
but would complete the self-employment section instead.
We've already done a helpful video
on self-assessment returns,
so click on the card above to learn more
about completing and filing one of these.