As the old saying goes, in this world, nothing is certain except death and taxes.
So, it was inevitable that HM Revenue & Customs (HMRC) would turn its attention to cryptocurrencies.
This is an area of which we hear plenty about, but few know much about, except they are a digital currency with no bank or Government backing.
HMRC is now demanding that taxpayers under investigation declare cryptocurrency and assets they have in e-money wallets and are treating them as subject to Capital Gains Tax (CGT).
While HMRC has always expected taxpayers to declare all of their assets on the statement of assets form during an investigation, the tax body is now being explicit in its demands for cryptoassets.
Previously HMRC suggested that trading cryptoassets could be ‘speculative’ and subject to the same rules as gambling – so exempt from tax.
Cryptocurrencies including Bitcoin, Ethereum and Dogecoin, are digital currencies that are decentralised – that is, not backed by banks and governments. Transactions are stored and recorded through a secure database called the blockchain, the technology behind cryptocurrency.
HMRC treats gains on cryptoassets or tokens as they describe them, in the same way as gains on other investments. This means gains are subject to Capital Gains Tax (CGT), which taxpayers report on a Self Assessment tax return when they make more than the annual tax-free income threshold of £12,300.
You might need to pay CGT when you:
- sell your tokens
- exchange your tokens for a different type of cryptoasset
- use your tokens to pay for goods or services
- give away your tokens to another person (unless it’s a gift to your spouse or civil partner), or
- if you donate tokens to charity, you may need to pay Capital Gains Tax on them.
You can deduct certain allowable costs when working out your gain, including the cost of:
- transaction fees paid before the transaction is added to a blockchain
- advertising for a buyer or seller
- drawing up a contract for the transaction
- making a valuation so you can work out your gain for that transaction
You can also deduct a proportion of the pooled cost of your tokens.
You cannot deduct costs:
- if you’ve already deducted against profits for Income Tax
- for so-called mining activities (like equipment or electricity)
HMRC has always asked taxpayers under investigation to include detailed information about all of their assets, but its updated statement of assets form should act as an important prompt to declare cryptoassets like Bitcoin.
Ultimately, it appears that HMRC’s aim is to leave any ambiguity about the tax treatment of cryptoassets behind.
But now, HMRC is keen to clarify the rules. Along with updating its statement of assets form, it published a ‘tax treatment of cryptoassets’ manual in March for its staff.
An HMRC spokesperson said: “The majority of individuals and businesses pay the tax that is due – however there remains a determined minority who refuse to play by the rules.
“We take robust action to make sure that everyone pays the tax due – from individuals operating in the hidden economy through to action against sophisticated organised crime groups, and complex investigations into offshore structures used to hide earnings and other assets.”