How tax officials are taking a growing interest in your cryptocurrency…
If you’ve been investing in the somewhat volatile world of cryptocurrencies lately, it’s not just the ever-changing rises and falls that could surprise you, you could also be liable for a weighty tax bill.
Earlier this year, a Reddit user posted that he’d been hit with a £36,000 tax bill after selling £86,000 worth of Bitcoin. As with any investment, you are required to pay tax on any gains you make and Her Majesty’s Revenue and Customs (HMRC) in the UK, as well as America’s Inland Revenue Service (IRS), recently warned cryptocurrency investments are not out of their respective reach.
In 2017 alone, Bitcoin soared from around £710 to a staggering £14,200. In fact, the value of cryptocurrency globally jumped by more than 3,300% last year, totalling over $600 billion. Research from the Cambridge Centre for Alternative Finance estimates there are as many as 11.5 million cryptocurrency wallets being used globally and the UK has the most exchanges, at 18%, with the US in second on 12%.
In the UK, HMRC rules state that any gain made from the buying or selling of cryptocurrency is liable to capital gains tax, in the same way the sale of property or assets is. The US’ Inland Revenue Service rules take a similar stance, that “virtual currency is treated as property for federal tax purposes.”
“We will not hesitate to use the powers Parliament has made available to us to identify those who are intent on evading tax,” a HMRC spokesperson told CryptoNewsReview. “Where an asset is held as an investment – as opposed to being working capital in a trading activity – the presumption is that any profit or gain on its disposal will be charged to capital gains tax.”
However, the spokesperson added: “The treatment of income received from, and charges made in connection with activities involving cryptocurrencies could also be subject to corporation tax or income tax, depending on the activities and the parties involved. Whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis taking into account the specific facts.”
What this means is that, broadly speaking, people who trade specifically in cryptocurrency as part of their job or as a business are liable to income tax. If the business is a limited company, they’re liable to corporation tax and for everyone else, the purchase and sale of cryptocurrency is liable to capital gains tax. There are, of course, exceptions, but this forms a general rule. If you’re confused, or want guidance, the HMRC Business Income manual is a good place to start.
Part of the problem lies in the fact there are multiple types of cryptocurrency, and its open-source, peer-to-peer nature can make it difficult for the authorities to track. As part of an investigation into tax evasion and cryptocurrency in February, the US Inland Revenue Service (IRS) ordered cryptocurrency exchange Coinbase to share data on 13,000 of its users in a bid to learn more about the transactions.
There’s also the matter of transaction size and what the “gain” actually is. If you were to sell Bitcoin for Ethereum, as an example, and received a substantial gain, you could be liable for the tax on that gain even though you haven’t converted it to sterling. HMRC summarises it as any “chargeable gain or allowable loss that arises when the cryptocurrency is sold or otherwise disposed of.” At its most basic level, capital gains tax applies to the following:
Any gain you make when you sell, or “dispose”, of:
- Personal possessions, including any virtual possessions, worth £6,000 or more, with the exception of your car
- Any property that isn’t your main residence
- Your home if you’ve used it for business or earned rental income from it
- Any shares not currently held in an ISA or PEP
- Business assets, also known as ‘chargeable assets’
Liability only comes into force, though, on gains you make above your annual tax-free allowance. The full list of capital gains tax rates is here, but as a guide, everyone in the UK of a working age is given a tax-free allowance called the Annual Exempt Amount.
For the 2018/2019 tax year, this personal allowance was set at £11,700 per person (up from £11,300 last year). This means you can gain £11,700 before paying any tax. If you need to know how much tax allowance you were given in previous years, click here.
Below is how to calculate any gains you’ve made from assets, including the sale of cryptocurrency.
- Deduct the price you bought the cryptocurrency (or other assets) for from the price you sold it for. This will give you the gain – or loss.
- Do this for all personal possessions, shares, property or business assets you’ve disposed of in the tax year.
- Add together each of these gains and losses to get a total gain/loss for the tax year.
- Deduct your tax-free allowance from this total.
- Now, work out how much other taxable income you have, from your employment for example, and minus any tax reliefs you get.
- Add this amount to your total taxable gains amount.
The amount you’ll then pay in tax depends on whether the total is within the basic income tax bracket, or if it pushes you into the higher rate. The basic rate covers anything earned between £11,851 and £46,350. Once you earn above £46,350 you are considered a higher rate taxpayer. Anything below £11,850 is tax free.
If the total amount of taxable income and gains falls in the basic income tax bracket, you’ll pay 20% tax on your income and 10% tax on your gains. If the total amount pushes you into the higher tax bracket, this rises to 40% tax on income and 20% tax on gains. Things get more complicated if your assets include residential property, but more information can be found here.
Say at the end of the 2018/2019 tax year you’ve earned £32,000 as a salary and sold Bitcoin at a profit of £20,000.
Your taxable income is £32,000 minus the tax-free allowance of £11,850 = £20,150
Your taxable gains are £20,000 minus your tax-free allowance of £11,700 = £8,300
This brings your total taxable amount to £28,450 and puts you in the basic income tax bracket.
You can now work out your tax liability:
20% of £20,150 = £4,030 income tax
10% of £8,300 = £830 capital gains tax.
If you jointly owned the cryptocurrency, you only pay capital gains tax on your share of the gain.