Declare cryptocurrency profits on a tax return

Many cryptocurrency investors are unsure of whether to report profits from their digital currency transactions and, if so, how to go about it.

In short, if you have sold, spent, or offered a cryptocurrency, you may need to report any profits (or gains on investment) made through the HM Revenue & Customs Self-Assessment Income Tax Return process.

Potential penalties for not reporting these profits include fines and interest charges, so getting it right is critical.

Here’s what you need to do and the potential tax liability associated with it.

UK tax rules for crypto-assets

The confusion with crypto taxes is that while you can keep coins in a digital wallet and use them to pay for goods or services, they are not treated the same as money or a foreign currency.

HMRC defines four categories:

  • Exchange tokens are intended for payments or investment. Bitcoin, for example, is a type of exchange token.
  • Utility tokens give the owner access to specific goods or services. For example, a business can issue tokens or accept them as a form of payment. Owners can trade utility tokens through exchanges or peer-to-peer transactions, just like an exchange token.
  • Security tokens indicate an interest or commercial right, which can mean ownership of shares in a company, the right to a portion of future profits, or a specific payment.
  • Stablecoins are designed to be less volatile and are a crypto asset linked to an existing conventional currency or a precious metal.

You need to know what types of tokens you have since the tax treatment will be based on this categorization.

How does HMRC tax cryptocurrency profits?

Since crypto coins are an asset, you need to report profits made and pay the associated capital gains tax if you live in the UK as a taxpayer.

Everyone has a tax-free annual allowance (£ 12,300 for 2021/22), so anything over is taxable.

Note that the annual exempt amount, applied to capital gains tax, is not the same as your personal tax-exempt allowance, applied to income tax.

Let’s take a simple example to show how this might work in practice:

  • You buy cryptocurrency for £ 8,000.
  • It is appreciating and is now worth £ 12,000.
  • You pay capital gains tax on your £ 4,000 profit.

The exact tax you pay depends on your overall income, but the tax rate will be 10 or 20 percent.

If you have no other capital gains and have not used your £ 12,300 allowance, you will not pay anything at all, but otherwise you will be taxable on the amount in excess of your allowance.

You must report the profit on a self-assessment income tax return, which may mean registering with HMRC if you are not receiving income other than through PAYE employment.

Crypto profits are sometimes income

HMRC considers some crypto asset transactions to be trading, which means capital gains tax does not apply, but income tax does.

UK profits from crypto transactions treated as income mean you’ll pay tax on the relevant tax bracket, minus your personal income tax allowance.

This could mean up to 45 percent liability for additional rate taxpayers.

Activities such as mining and staking are potentially subject to income tax, although this is unlikely.

Taxes on crypto-currencies offered

Capital gains tax rules mean that if you give cryptocurrency as a gift or exchange your coins for another currency, you have to pay a tax calculated based on the increase in value from the date of your initial investment and the date you made the gift or exchange.

The usual allowances apply and the crypto-assets offered are still taxable if your income is treated as income or subject to corporation tax as a business.

Declare losses on a crypto investment

You won’t need to pay tax if your crypto-assets have lost value and you’ve suffered a loss, but it’s worth reporting as you may be able to offset that loss with others. profits.

Loss relief is also available for businesses if you are negotiating through a UK business to reduce your corporation tax bill.

You will need to file your tax returns to claim the compensation.

HMRC won’t expect you to pay taxes if you haven’t done anything with your cryptoassets – so if you don’t trade them, there’s no profit to report.

Essentially, you become liable for capital gains tax when there is a crystallization event – that is, an event where you make that profit and trade your cryptocurrency for something else.

It is not possible to calculate your gain with precision if you have not had the crypto coins, and the exact assessed value will depend on the information resulting from this exchange.

However, exchanging one cryptocurrency for another Is counts as an assignment and you will have to report your profits.

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Tax planning for crypto-asset investments

Like any other income, business, or self-employment, you can schedule your tax bill based on what you plan to do with your cryptocurrency coins.

It’s wise to submit returns quickly, as the significant risk is that the volatility of cryptocurrencies will make it difficult to pay your tax bill if your assets have since lost value.

For example:

  • If you make a profit on a cryptocurrency exchange in 2020/21, your tax return and self-assessment payment are due on January 31, 2022.
  • During these intervening ten months, if your assets have lost value and you have suffered a loss, you will not be able to claim loss compensation until the end of the new tax year on April 5, 2022.
  • HMRC will not postpone a tax bill (although you can set up a payment term agreement), but the problem is that your tax remains payable before you can compensate for a subsequent loss.

The best way to avoid this problem is to report your profits quickly at the end of the tax year and use the gain to pay the resulting tax burden.

You can work with a tax advisor or financial planner to keep up to date with your tax account, and you should always make sure to keep records for each transaction to support any claims you need to make.

Records include the type of crypto assets you own, transaction dates, the exchange made, the number of units and the value in pounds sterling, a running total of all your investment units, and backup documents. such as bank statements or wallet addresses.

Frequently Asked Questions – Declare Profits From Cryptocurrency

Do companies pay taxes on crypto transactions?

If you buy or sell crypto assets through a business, that usually means paying a 19% tax.
Businesses are subject to tax on all crypto activities involving the exchange of tokens, including buying or selling exchange tokens, exchanging tokens for another crypto asset or any other resource, and receiving exchange tokens in payment for goods or services.

What are crypto assets for tax purposes?

Crypto assets come in thousands of types and are categorized into different categories by HMRC as noted above.

Cryptocurrencies are digital units of value, or a contractual right, that are cryptographically secure. This includes any digital currency that you can transfer, store, or exchange.

Your coins are kept in a virtual wallet, which you access through a platform or app. The confusion arises from the fact that there is no regulator or bank that oversees the management of this system.

Every crypto transaction is recorded through the blockchain (like a public ledger) and you can download reports showing transactions and transactions to help you complete your tax return.

How does HMRC know if I own crypto assets?

It’s never wise to assume that the tax office doesn’t know you own crypto assets, and the penalties for not reporting profits can be substantial.

HMRC has a range of analytical tools and will audit your tax affairs if it has reason to believe that you have more income in your bank account than your tax returns indicate.

As crypto becomes more mainstream, the government will likely introduce regulations, forcing crypto platforms to report to account holders.

Why are cryptocurrency profits taxable?

It is a common myth that crypto assets cannot be taxed because investing in cryptocurrency is more like a game than an income.

This is incorrect, and cryptoassets are taxable like any other, usually through the capital gains tax system.

What happens if I don’t report my profits on cryptocurrency transactions?

The HMRC can investigate your income for up to 20 years after the end of the tax year, so if you haven’t reported a profit in a period, that doesn’t mean it won’t catch up with you. not.

Taxpayers who deliberately avoid reporting gains may be subject to penalties and interest of up to 100% of the amount owed.

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