When the value of Bitcoin surged to an emphatic $19,000 back in December, millions of people the world over took notice and decidedly wanted their own slice of the crypto cake.
Unfortunately, what many failed to take into account was that this get-rich-quick-scheme was not exempt from one of life’s most unavoidable elements - tax.
So, if you’re wondering why HMRC have sent you a letter stating you must submit a tax return, it’s because the exchange you’re using has shared your data.
In the small print of each of the world’s online cryptocurrency exchanges is the fact that upon registration and submission of ID (usually a passport), your details are passed on to the respective tax commission in your country - i.e., if you’ve registered with a British ID or passport, HMRC will be made aware of your activity.
As the country’s leading cryptocurrency accountants, our team are highly experienced in working with clients to submit their cryptocurrency tax return and/or advising clients on all matters concerning cryptocurrency.
Get in touch with our team to further discuss your cryptocurrency tax return and a bespoke service designed specifically to suit your needs.
From its origins as a virtually valueless cryptocurrency in early 2009, Bitcoin went at least partially under the radar for several years while its stock grew rapidly, particularly throughout 2017 as it reached its peak.
As Bitcoin mounted its surge and knowledge of the cryptocurrency movement became more widespread, it was inevitable that the number of cryptocurrencies on the market would expand with great speed, too.
With over 1,600 cryptocurrencies in circulation as of July 2018, there is a huge array of investment opportunities, and consequently, a vast number of individuals liable to pay tax on the money they have earned from cryptocurrency, be that Bitcoin or otherwise.
The most important thing to be aware of is a tax liability is recognised each time an asset is exchanged for another asset.
In cryptocurrency terms, you may switch one crypto-asset for another and not receive any “real” money for it, but you will trigger a tax liability because you have sold an asset and bought a new asset for a gain.
The taxation of cryptocurrency can fall into three categories and the way in which your assets are treated depends on the activity that has gone beforehand.
The three brackets for tax on cryptocurrency are - capital gains tax; trading income; gambling.
Capital gains tax is reasonably straightforward when it comes to cryptocurrency.
As with all chargeable gains, it is essentially the selling price minus the original cost, and if sold through a limited company, indexation allowance will apply.
The main difficulty comes with establishing the selling price as most crypto-assets cannot be converted straight into a fiat currency.
Therefore, if you have traded between two cryptocurrencies, you will more than likely have to convert them into a major cryptocurrency (Bitcoin/Ethereum) before converting that into a fiat currency equivalent.
The trading of crypto-assets is the most difficult area. Effectively, crypto-assets should be treated as trading stock, and therefore have to be valued at the lower cost and net realisable value.
To establish cost, you need to create a financial model that tracks each type of cryptocurrency and its original cost. From there, this has to be valued on either a FIFO or AVCO basis, in line with HMRC’s allowable inventory valuation methods.
The same financial model then needs to track each sale of crypto, the original cost of what has been sold, and calculate a profit/loss each time a transaction occurs. Often the trades are between assets that aren’t convertible into fiat, so the model needs to convert each trade to a fiat equivalent.
Once done, any allowable costs need to be taken into account as normal, the year end stock balances checked for impairment, before finally producing trading accounts and entering them on either a self assessment or corporate return.
Our in-house cryptocurrency expert, Stuart Airey, has devised numerous models similar to the one described above. Get in touch to discuss how Stuart can help you devise a financial model suitable for your trading activity.
It may be possible to try and classify an investment in cryptocurrency as a gamble. This would more likely be successful if the individual had originally bought in many years ago, when there was no real expected return. It’s very difficult to say how successful such an approach would be. However, due to the tax exemption around gambling gains, this may be an attractive route in some scenarios.
In the majority of situations, the main question you will have to try and answer is whether the transactions in cryptocurrency are a form of trading income (and subject to income tax/corporation tax), or capital gains income (subject to capital gains tax/corporation tax (with allowable indexation).
There is no definitive answer on what a trade actually is, and there is little guidance from HMRC on how cryptocurrency should be accounted for (the last brief being in 2014).
The best way of looking at it is to consider the general badges of trade on HMRC’s website. It may also be worthwhile looking at case law on share dealing, as the nature of the activities is very similar.
For those who have received letters from HMRC regarding the completion of a tax return, it is vital to note that HMRC have automatically registered you for self assessment and are aware that you have unpaid tax from year(s) gone by.
Those in receipt of a letter from the 2016/17 tax year and earlier are deemed late in paying their taxes and, therefore, submission and payment is due 3 months from the date of the letter.
On the other hand, for those who have been trading cryptocurrency, it is vital that you register for self assessment by October 2018, otherwise you may face penalties from HMRC.
Registering in time makes you aware of your tax position and gives you ample amount of time to collate the data and resources you need in order to comply with HMRC’s tax rules and avoid any hefty fines for late payment.