Investing and trading in cryptocurrency has become increasingly popular over the last few years.
However, the tax treatment of any profits made through these activities is poorly understood. Many crypto investors mistakenly believe they do not have to pay tax on any profits – this is not the case!
As there are potentially large sums of money involved, this has raised the profile of cryptocurrency investment with HMRC who want to ensure that all individuals and businesses are paying the correct amount of UK tax on their cryptocurrency and other cryptoassets. Therefore, it is important to be aware of your tax obligations for your crypto activities and you seek professional advice from a specialist cryptocurrency accountant and tax advisor.
How we can help you
PKF Francis Clark is a firm of chartered certified accountants and tax advisors. We have a specialist crypto team who are passionate about crypto and blockchain and the exciting opportunities they present alongside an understanding of the tax and legislation landscape.
How are cryptocurrencies and cryptoassets taxed?
The main problem is that there is no specific crypto tax legislation. Therefore, in the UK, profits are taxed in different ways depending on the actions and circumstances of the taxpayer. Capital gains tax, income tax and inheritance tax all come into play when looking at buying, selling and acquiring cryptocurrencies.
When individuals buy and sell cryptoassets, depending on the frequency and value involved, this is usually seen as an investment activity and any gains made are potentially subject to capital gains tax. There is an annual exemption, but if this is exceeded (including the selling of other assets such as shares or property), tax will need to be paid.
It is a mistake to believe that only when you sell a cryptoasset for money, say in pounds sterling, that this is when it becomes a gain and therefore liable for capital gains tax. A gain can also arise when cryptoassets are exchanged – say from Cardano to Tezos or Bitcoin to Ethereum or if crytoassets are gifted to another person or when they are used to pay for goods and services.
This calculation can be complicated, particularly if you have other assets that you are also disposing of during the tax year. Our team can help accurately calculate the gain, prepare the tax return, and assist with effective tax planning to make sure it is as tax efficient as possible.
Income tax and national insurance become liable on the value of the asset when certain criteria are met and include things like remuneration from employers, crytoasset trading, mining and even occasionally airdrops.
When an employee receives cryptoassets as earnings from their employer, then income tax and national insurance become due. Additionally, when the cryptoassets are disposed of later, then they can also be liable for capital gains tax.
If HMRC considers your activities to be a trade, rather than investing, then you will be taxed as if you are running a business and income tax will be due.
There are a number of factors that influence this decision, and it can be complicated. It is therefore important that professional advice is sought from specialist cryptocurrency accountants.
When receiving cryptoassets as rewards for mining it will depend on the level of reward, how active you are and from whom you are receiving the assets whether you fall into taxable trade and are therefore liable for income tax. Again, this is a complex area and advice should be sought at an early opportunity.
On top of this, if cryptoassets are kept and then disposed of later these are also then liable for capital gains tax (if gain is above the allowance for the tax year). Again, careful tax planning is advised – and we can help.
These are not usually subject to income tax where the asset has been dropped into your wallet for a personal capacity. However, where this has been done in exchange for a service (or a service that will be performed) then it can fall into income tax rules – take advice!
Cryptoassets are in the same asset class as property for inheritance tax purposes and are therefore subject to inheritance tax and effective tax planning should be undertaken to ensure your tax affairs are in order.
Cryptocurrency investing – the wild west?
We are here to help. With an increasing number of scams taking advantage of misinformed crypto investors, we encourage those new to digital assets to ensure they have all the information they require before taking the leap. Whilst we cannot provide any investment advice, we can discuss risk and help you to access safe and secure ways of crypto investing.
Businesses Operating in Blockchain Technology
In the growing field of blockchain technology, you need a business advisor who speaks your language. From TGEs to SAFTs, DApps to airdrops, minting to mining, ERC-721 to ERC-1155, our team understand your business, and are on hand to work with you every step of the way.
Understanding the tax environment in which your business operates is essential to mitigate financial risk and to meet your obligations. With an increasing amount of money in this market and locked in DeFi, tax legislation is playing catch up.
Alongside the compliance services that you would expect from an accountant: accounts preparation and financial reporting, self-assessment and corporate tax returns, audit, VAT and company secretarial services, we also provide support to businesses by offering solutions and efficiencies with the aid of institutions and contacts in our network.
We are not just Tax and Accounting Advisors
Thanks to our extensive network within the sector, we can put you in touch with experienced people to make your ambition a reality.
We work with solicitors, developers, NFT platforms, custodians & exchanges, to help build you the solution you require, whilst being there to support you throughout your journey. Whatever your cryptocurrency or blockchain need, we have you covered.
Contact Ben Lee
Ben heads up the firm’s cryptocurrency & blockchain offering.
He is a DeFi curious protocol protagonist, having monitored the sector for over a decade, advising numerous clients who have invested, traded, or mined cryptocurrency, or have started their own blockchain-related business.