Cryptocurrencies, like Bitcoin and Ethereum, are not subject to UK tax when you buy them. They are treated as ‘cryptoassets’ by HMRC, which means that you might have to pay income tax or Capital Gains Tax when you sell it.
What does HMRC mean by ‘cryptoassets’?
HMRC does not consider any crypto currency to be an actual currency or money and refers to them as ‘cryptoassets’ in all of their documents. This is already confusing because as the language involved reinforces the idea that they are a new currency.
HMRC’s definition says: “Cryptoassets (or ‘cryptocurrency’ as they are also known) are cryptographically secured digital representations of value or contractual rights that can be: transferred, stored, traded electronically. While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets.”
Their Cryptoasset Taskforce defined three types of “tokens”:
- Exchange tokens: like Bitcoin. They use Distributed Ledger Technology (DLT), also known as blockchain. This DLT is free from control of any bank, individual or group. The value of exchange tokens is therefore not based on investment or assets. The value is in its use as a method of payment or investment. It does not entitle the owner to any specific goods or services.
- Utility tokens: These are usually given out by businesses and can be used on a specified platform in exchange for their goods or services.
- Security tokens: They are a means of buying into a company and give the holder a financial stake in the business, like a share of the profit.
HMRC’s cryptoasset guidance so far has focused on the exchange tokens. Their report explains that more may be added to account for utility and security tokens. They also make it clear that the tax rules will be applied to each case on an individual basis, not based on the type of token involved.
Cryptoassets and Capital Gains Tax
Income made from selling your cryptoassets is subject to Capital Gains Tax, just like any other applicable income stream.
Once you earn over the Capital Gains tax free allowance of £12,300 (for 2020-21 tax year), you must pay Capital Gains Tax on the remainder. This is sometimes called the Annual Exempt Allowance. This isn’t just based on money you’ve earned from selling cryptoassets, but the total you earn from selling any assets. This includes things like personal possessions worth more than £6,000, shares and some property.
How much is Capital Gains Tax?
If you are in the Basic Rate income tax band, you pay 10% Capital Gains Tax. People in the Higher and Additional Rate tax bands pay Capital Gains Tax at a rate of 20%. That is the percentage of the ‘gain’ you have made from selling your assets.
You add together everything you made from the sale of all your assets. Deduct the Capital Gains tax-free allowance (£12,300 for 2020-21 tax year) and that is the amount you owe Capital Gains Tax on.
It’s worth noting here, that this is the situation for individuals. If you have a cryptocurrency business that buys and sells the assets, you will need to look at a different kind of tax treatment. This is likely to mean that you owe income tax, rather than capital gains tax.
How do I pay Capital Gains Tax on my bitcoin earnings?
You declare your bitcoin earnings to HMRC using the Self Assessment system. You will need to file a self assessment tax return. HMRC’s Making Tax Digital programme has successfully encouraged most people to submit their tax returns online. The deadline for this is midnight on the 31st January after the end of the tax year. So, for the 2020-21 tax year, the filing deadline is 31st January 2022.
You can still file a paper return, but the deadline is earlier, on the 31st October.
There are fines for missing the deadline, late payment and errors in your paperwork. Many wise taxpayers seek the advice of an expert before they click send.