There is currently widespread uncertainty about the tax treatment of cryptocurrency investments and trading activity.
If you have sold, gifted or spent cryptocurrency within the tax year, you may need to declare any profit or gains on your self-assessment tax return.
If you do not declare taxable income or gains, you may be liable to interest and penalties.
How much tax will I need to pay on my cryptocurrency?
Profits made on cryptocurrencies by individuals is generally subject to capital gains tax at a rate of up to 20% after deducting the annual allowance (£12,300 for the 2020/21 tax year). Where you have bought and sold cryptocurrencies through a UK company, any taxable profits will be subject to corporation tax at a rate of 19%. If you have regularly bought and sold cryptocurrencies, HMRC may say that you are liable to income tax at a rate of up to 45%. Most exchanges will keep a record of your transactions and let you download your history.
If I gift my cryptocurrency, am I liable to tax?
Under existing capital gains tax rules, if you gift your cryptocurrency or use it to buy other capital assets (including exchanging one cryptocurrency for another), you will have to pay tax on any increase in the value of your cryptocurrency between the date you acquired it and the date of the gift or purchase (subject to any available reliefs or allowances). Similar rules apply if you are subject to corporation tax or income tax on your profits.
How will HMRC know about my profits?
HMRC has significant powers to acquire and analyse information on UK taxpayers. If HMRC raises an enquiry into your tax returns, it is likely to question the appearance of profits in your bank account that have not been accounted for. The UK and EU are also currently consulting on new regulations that may require trading platforms to report information on certain account holders to the relevant national authorities.
What if I have made a loss?
If you have made a loss, you may be able to offset these losses against your cryptocurrency profits or other capital/trading profits. If you have bought and sold cryptocurrencies through a UK company and the company has made a loss on any individual transactions, loss relief may be available under the corporation tax loss relief rules. As mentioned above, many exchanges will keep a record of your transactions and let you download your history. It is essential to keep these records on file so that you can claim relief for any losses that you make.
What if I fail to declare any taxable profits?
HMRC has up to 20 years following the end of the relevant tax year to enquire into your tax returns. If you deliberately fail to declare taxable income or gains and tax has been underpaid, you may be liable to interest and penalties of up to 100% of the amount of tax due. In the most serious circumstances, criminal liability may apply.
Where can I get advice?
A qualified professional can provide advice and help you to make the necessary disclosures on your tax return.