Paying Tax on Bitcoin and Cryptocurrencies
Bitcoin, amongst other cryptocurrencies, is becoming a more popular way to invest your capital. With many making small investments as a hobby, some make their living by analysing these markets and investing strategically.
If you do happen to make big gains on your investments, you may be liable to pay extra tax. In this article, we will explain the process of paying taxes on Bitcoin and cryptocurrencies.
What is Bitcoin?
Traditionally, individual countries have their own central bank with their own currency. For example, Britain has the Bank of England use sterling as their currency. This can sometimes cause some issues. If two individuals wish to send money, said individuals cannot simply transfer the funds directly to each other. Instead, this is dealt with by many retail banks who report it to the country’s central bank. This results in many intermediaries between each person, resulting in higher fees per transaction.
This is where Bitcoin is a bit different. Bitcoin is decentralized, meaning that it does not have a central bank, meaning you can transfer money between individuals without the need for an intermediary. Better still, this also allows us to have a record of all Bitcoin transactions, as data does not need to be spread across various central banks. Individuals also remain anonymous, ensuring that the ledger of transactions is secure and confidential.
Investing in Cryptocurrency
Since many have made headline-grabbing returns in some cryptocurrencies, investors have flocked to make investments. However, under the surface, an investment always has an element of risk and cryptocurrency can often be more volatile than traditional investments such as stocks and shares.
Unfortunately, there has been a rise in the number of crypto-scammers, who seek to defraud individuals for thousands of pounds, convincing them to invest in newly-made currencies, only to rocket the price before selling themselves.
In any case, ensure that you research thoroughly before investing in cryptocurrency as often, some exchanges make it difficult for asset holders to dispose of their assets and convert them into standard currency.
How are Cryptocurrencies taxed?
Since cryptocurrency is different to traditional investments, so is the tax legislation. Let us walk you through what you need to know.
1) Sale of Cryptocurrency
When you sell your cryptocurrency in consideration for standard currency (GBP, USD, etc.), this is deemed to be a taxable event. The capital gain or loss is determined to be the sale price (less any disposal costs such as exchange fees) minus the cost of the asset when purchased.
HMRC treats cryptocurrency as a digital asset and therefore the sale of cryptocurrency is captured by capital gains tax rules.
2) Crypto to Crypto Transactions
If you were to sell one type of cryptocurrency for another, e.g. if you were to buy Bitcoin using Ethereum, HMRC deems this to be two separate transactions, namely capital disposal of Ethereum and purchase of Bitcoin.
This capital disposal may be liable to capital gains tax and a detailed assessment is required to calculate any capital gains tax due.
3) Using Cryptocurrency to purchase goods or services
Currently, under HMRC guidance, the use of cryptocurrency to purchase goods or services is treated as capital disposal of that cryptocurrency which is taxable under the capital gains tax rules. For example, if you were to buy a car for 5 Bitcoin, capital gains tax may be due as this would be deemed to be a capital disposal of 5 Bitcoin.
4) Gifting Cryptocurrency
As cryptocurrency is treated as an asset by HMRC, any gifts of cryptocurrency would fall under the usual capital gains tax rules. As a result, any spouse transfers of cryptocurrency are tax-free, in line with guidance for other asset transfers.
If you have any concerns about how cryptocurrencies are taxed and the impact on your tax position, please call us on 01348380380 or email enquiries@pritcharddigital.cymru.
This article is not personal investment advice. We can only advise on the tax treatment on the disposal of cryptocurrencies, including the filing of income tax and/or capital gains tax returns with HMRC, with reference to published guidance from HMRC.