Cryptoassets and taxation

Cryptoassets have become increasingly popular amongst many investors. They include a range of assets including cryptocurrencies, utility coins and security tokens. 

In June 2022, the combined value of over 20,000 various cryptocurrencies was estimated to be worth $930 billion. This is down from its peak in November 2021 when it capped at nearly $3 trillion.

Whether you are looking to purchase your first cryptoasset, or you have already made a jump into cryptoasset investments, it is important to understand the quantum and timing of your tax exposure as well as what records you need to keep.

Cryptoassets and tax – basic treatment

HMRC considers cryptoassets a capital asset held for investment purposes. This means that sales or disposals of cryptoassets will usually generate a capital gain or loss for tax purposes. Capital gains are subject to Capital Gains Tax (“CGT”).

Capital gains may occur when you:

• Sell cryptoasset tokens

• Exchange cryptoasset tokens for a different type of cryptoasset token

• Use cryptoasset tokens to pay for goods or services

• Give cryptoasset tokens away to another person (excluding a spouse or civil partner).

The gain on the disposal of cryptoassets are typically the cryptoasset value at disposal in £GBP less:

• The cost of purchase

• Transaction fees

• Advertising for a purchaser or a vendor

Purchases and sales of cryptoassets are “pooled” for tax purposes. Each type of cryptoasset is to be kept in its own pool.

The specific method of taxation and the amount chargeable depends on whether the investment is held by an individual, or within a structure such as a limited company – see below for the difference.

Individuals

Net cryptoasset gains after the utilisation of any available capital losses in the tax year to 5 April should be reported on a self-assessment tax return. Any tax due becomes payable by 31 January following that tax year end.

Each individual in the UK is also entitled to an Annual Exemption from CGT. For the 2022/23 tax year, the amount is £12,300. This will then taper to £6,000 in 2023/24, and £3,000 in 2024/25 and beyond.

Those with smaller cryptoassets portfolios might not therefore owe any tax, but it may still be necessary to report disposals. As a reminder, the Annual Exemption applies to all net gains (including both cryptoassets and non-cryptoassets), so this will need to be considered in conjunction with any other investments that are disposed in the same tax year.

Companies

Disposals of cryptoassets within a company structure will be reported on the company’s corporation tax return. Any resulting tax will fall due 9 months and 1 day after the end of the company’s accounting period.

The gain is chargeable to corporation tax, currently at a rate of 19%. The Annual Exemption is not available to companies.

Traders

In some exceptional cases HMRC 

may consider cryptoassets activity to be a trade. Whether the buying and selling of cryptoassets amounts to a trade will depend on a range of factors including:

• Frequency

• Level of organisation

• Intention

CGT on exchanges

Capital gains chargeable to tax can occur not only when you “cash in” cryptoassets but also within a cryptoasset investment portfolio. Exchanging Bitcoin for Ethereum for example, will not avoid a capital gain becoming chargeable to tax even though no cash has been withdrawn.

Moving tokens between wallets however does not constitute a disposal where there is no change in beneficial ownership.

Record keeping

HMRC state that it is the taxpayer’s responsibility to keep separate records for each cryptoasset transaction.

Such records include:

• The type of cryptoasset

• Dates of transactions

• If they were bought or sold

• The number of units involved

• Values of the transactions £GBP (at the date of the transactions)

• Cumulative total of the investment units help

• Bank statements and wallet addresses, in case of an enquiry or review

If you have a lot of cryptoasset transactions, it might be advisable to make use of a UK tax compliant cryptoasset-tracking software to record your gains.

A lot of software packages are geared towards the US market therefore you must ensure that the software you choose is UK-tax compliant.

Find out more

If you need professional tax advice in connection with a cryptocurrency asset, please get in touch with our friendly team of advisers at www.carpenterbox.com