Cryptoassets – Do you know your Tax obligations?
The recent ‘correction’ to values of cryptocurrencies has meant the hype and furore of the last few years have now subsided and many investors are left licking their wounds as their holdings are now worth substantially less than they invested, or previously gained profits have been lost following reinvestment.
Many have, therefore, overlooked the potential tax obligations for reporting crypto transactions, sometimes due to a lack of understanding of how such transactions are treated for tax purposes, especially where no withdrawals are made from the exchange or goods have been purchased with cryptocurrency. This could mean that, even where investments currently sit at a loss, had there been additional transactions in between the initial investment and the current position, there could still be tax issues lurking in the background.
9th September 2022
Chris Watts See profile
It has been widely reported that HMRC have been given data by various digital exchanges of individuals and their respective transactions and that they have already started writing to individuals who have not reported these transactions on their Tax Returns.
In very simplistic terms, the straightforward buying and selling of the most common forms of cryptoassets and currencies is treated in the same way as if it were stocks and shares. Each type of asset is looked at separately and any profit or loss on that type is taxed under the capital gains rules.
Software is available to assist with calculating the gains and losses from information that can be downloaded from an exchange. However, care still needs to be given to ensure the data has been interpreted correctly as there can be fundamental errors in the calculations if the data has been misinterpreted by the software.
The following sets out the basic principles that should be used as a guide. However, where any holdings are substantial or complex in nature then specialist advice should be sought if there is any concern about how the tax rules will be applied.
A lot of confusion arises as to whether a gain or loss is reportable where cryptocurrencies are exchanged for another, either by an actual disposal of one asset followed by a new acquisition of another, or where different currencies are swapped. Even where the value received never leaves the exchange e.g., is not withdrawn as FIAT currency (GBP, USD, EUR etc), a taxable transaction has been created on the disposal. The situation is no different to that of a stockbroker account – where shares in one company are sold and then immediately replaced by a shares in a different company, the gain or loss on the initial disposal is a reportable transaction for tax purposes even though the monies never leave the stockbroking account.
This can perhaps best be explained with a hypothetical example. Let us say that an initial investment of £5,000 was made into Bitcoin (BTC) in 2018/19. The Bitcoin is then sold for £30,000 in the 2021/22 tax year, creating a gain of £25,000. The proceeds were then immediately reinvested into Ethereum (ETH), but the subsequent value of the ETH had dipped back down to £5,000 during the 2022/23 tax year. No monies have left their exchange. However even though the individual still has an investment worth £5,000, the change from BTC to ETC yielded a taxable gain of £25,000 in the 21/22 tax year which requires reporting on their self-assessment tax return.
Even if the ETH was now sold to create a loss of £25,000, this capital loss cannot ordinarily be carried back to an earlier tax year, and so there is no set-off against the earlier gain. The individual, therefore, must pay Capital Gains Tax on the sale of the BTC, even though if they were to now withdraw the proceeds of an ETH sale into FIAT currency, they would still only be left with their initial £5,000 investment.
For individuals with moderate levels of cryptoassets and activities, any income generated from them is likely to be small. Provided this is below £1,000 in a tax year then no Income Tax will be payable in this as it would be covered by the trading allowance given by HMRC to each individual.
Unless it can be considered the level of activities forms a trade or business, then any amount above £1,000 would be chargeable as other income and not subject to National Insurance Contributions. If you believe the number of transactions could constitute a business, then please seek advice from your Old Mill contact to discuss further, both on the immediate tax position but also any potential tax planning.
NFTs, which mainly come in the form of pieces of digital artwork, are one of the more recent fashions in the crypto world, especially as celebrities and some sporting organisations are now heavily promoting these.
From a tax point of view, NFTs can be more difficult to identify in nature as they can be acquired or created, with the resulting tax position being different depending on the circumstances of ownership.
Again, to look at it simplistically for tax purposes, NFTs could be viewed as pieces of physical art and the tax rules applied as if a person were an art dealer, an artist themselves, or a casual investor/collector in paintings who buys and sells on the odd occasion. As well as considering whether any profits or losses should be treated as chargeable to Income Tax or capital gains, any person who could be seen to be dealing in NFTs may also be subject to VAT and therefore careful consideration needs to be looked at when calculating whether they have breached the VAT turnover threshold when taking into account any other sources of Vatable income.
Where other areas of crypto are involved, some of the tax rules are not clear and whilst HMRC is producing guidance and consultations on their views, this does not always agree with how professional advisers may view it.
Old Mill can assist with advising whether you have an obligation to declare any income or gains on your Tax Return. If you have failed to disclose any income or gains in previous years, then a voluntary disclosure can be made to HMRC, which will help to reduce any potential penalty chargeable for these omissions.