Throughout the final quarter of 2017 the financial world witnessed a rapid rise in the popularity of “cryptocurrencies” such as Bitcoin, Ethereum and Litecoin. These new decentralised electronic currencies with their instant financial transactions attracted large numbers of investors, few of whom gave much thought to the implications for their tax returns!
The general rule for currency transactions (such as US $) is that gains or losses suffered by individual taxpayers are exempted from tax where the currency is held for the individual’s personal use (as against an investment). When it comes to cryptocurrencies, however, the rules are different.
In the UK, cryptocurrency is considered a chargeable asset by HMRC. As such, in the vast majority of cases it falls under the remit of some of the more familiar taxes, those being: Capital Gains Tax (CGT), Income Tax and Corporation Tax dependent upon whether you are an individual or limited company.
CGT applies to individual investors in a similar way to the purchase of shares, in that no tax is charged when you first acquire the cryptocurrency and only comes into play following its eventual sale. Similarly if you are sitting on unrealised cryptocurrency gains at the tax year end there will be no need to disclose them on your tax return. A record should be kept of the price paid for each cryptocurrency holding which will be deducted when declaring the eventual disposal for CGT purposes. HMRC indicate that the cost to be set against disposals is calculated on a “pooled” basis similar to shares – which may give different gains to those you might be expecting.
Each individual is entitled to an annual CGT exemption (£11,300 for 2017/18) and if total gains are less than this then no tax charge will arise. If total chargeable gains exceed the exempt sum then tax will be payable at either 10% or 20% dependant on the level of an individual’s total income and gains.
If proceeds from all disposals liable to CGT do not exceed four times the CGT exemption (so £45,200 for 2017/18) and total gains are below the exemption, they do not have to be reported to HMRC.
This is simple enough for those already completing tax returns each year, but for others a new disclosure requirement will arise. Strictly, notification to HMRC that a tax return is required should be made by 5 October following the end of a given tax year - but no penalties are levied as long as full disclosure is made within a tax return and this is submitted and the tax paid by the due date (31 January 2019 for any 2017/18 gains).
A few taxpayers may become liable to Income Tax rather than CGT if they have been (very) regular traders in a similar fashion to (say) a stockbroker … and again they will be obliged to disclose within the same timeframes.
Any gains realised by limited companies would need to be disclosed within the company’s Corporation Tax return with no prospect of a £11,300 exemption for last year.
So if this article has reminded you that you made a few bob on selling cryptocurrencies in the tax year ended 5 April 2018 you now need to speak with your usual Kreston Reeves adviser, or contact us here, to ensure the required disclosure is made to HMRC.
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