Cryptoassets, also known as cryptocurrencies, are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically.
They are a relatively new type of asset that have become more prevalent in recent years. There are thousands of different types of Cryptoassets; Bitcoin, Ripple, Litecoin and Ethereum have all been mentioned in the news recently.
Cryptoassets are generally held as investments by people who expect their value to rise.
We have been waiting for HMRC to provide guidance on cryptoassets for a long time. At long last they have issued some. You can read it in full here or read our headlines below.
Do I need to pay Income Tax when I receive cryptoassets?
If you receive cryptoasset exchange tokens (also known as cryptocurrency) from employment or via mining then HMRC think this is income and you need to record it. Depending on your circumstances you may need to pay Income tax or National Insurance contributions.
If you buy cryptocurrency there is no Tax to pay but you may need to pay Tax when you sell them.
What if my employer gives me tokens?
It all depends on whether the cryptocurrency you are paid is classed as a readily convertible asset or not. Can the cryptocurrency be easily exchanged for real cash? If it can, then your employer must pay Income Tax and National Insurance through PAYE as though the cryptocurrency was cash.
The employer will have to estimate how much the cryptocurrency is worth when they give it to you and pay the Tax and NI based on that value.
Obviously if you also get paid cash, that will be subject to Tax and NI under PAYE. The situation could arise where you only receive tokens or you do not get enough cash from your other wages to cover the Tax due on your tokens. In this case your employer has to pay the Income Tax over to HMRC on your behalf. Then you have to reimburse them within 90 days of the end of the Tax year.
If the cryptocurrency you get from your employer is not a readily convertible asset then you have to check whether or not the employer has paid Income Tax on anything you have received through PAYE. If they have not, you will need to pay it yourself. You will have to complete a Self-assessment Tax return.
Do I have to pay Tax when I sell my cryptocurrency?
A liability to Capital Gains Tax will arise in various circumstances, like if you:
- Sell your tokens
- Exchange them for a different type of cryptoasset
- Use them to pay for goods or services
- Give them away to another person (however, if it is to your spouse or civil partner there will be no CGT implications)
- Donate them to charity
How do I work out my Capital Gains Tax liability?
Each time you do a possible CGT transaction you need to work out whether there is a gain. The gain is normally the difference between what you paid for your token(s) and what you sold it (them) for. If the token was free, you will need to know its market value on the date you acquired it.
You do not pay Capital Gains Tax on the value of tokens received as Income where you’ve suffered Income Tax. You only pay Capital Gains Tax on any gain made after receiving the tokens.
Allowable costs can be included when calculating any gain. Any Capital Losses can reduce the gain, but these need to have been reported to HMRC. If your total gain is above the annual Tax-free allowance you must pay Capital Gains Tax on the proportion above the allowance.
What are allowable costs?
- Transaction fees paid before the transaction is added to a block chain.
- Advertising for a buyer or seller.
- Drawing up a contract for the transaction.
- Valuation costs where you need to work out a cost so you can work out a gain.
- A proportion of the pool costs of your tokens is deductible.
You are not allowed to deduct the costs that you have already set off against profits for Income Tax purposes or your costs of mining activities such as equipment or electricity.
What about token cost pools?
For each type of token, you own you have to pool them together and work out a pooled cost. This is similar to what you do with shares. Then when you sell tokens from a pool you deduct an equivalent proportion of the pooled cost as part of the calculation of the net gain. You need to be aware that token pooled costs are affected if there has been a hard fork in the block chain.
Every time you buy or sell tokens then the pool cost will need to be recalculated. When you buy them, you add the amount you paid for them to the appropriate pool. When you sell them, you deduct an equivalent proportion of the pool cost from the pool. It goes without saying you must keep records for each pool.
There are special rules for tokens that you buy on the same day that you sell tokens of the same type, or within 30 days of selling tokens of the same type. You do not pool such tokens. The rules are the same for working out the cost of shares bought on the same day or within 30 days.
What if I get my tokens from mining activities?
If you get your tokens from mining activities and are not a trader these will be treated as Other Taxable Income. You will have to complete a Self-assessment Tax return (if you don’t already). However, if your cryptocurrency is worth less than £ 1,000 and you have no more than £ 2,500 from other untaxed income you won’t need to complete a Tax return.
If you have any questions or would like to set up a call to discuss your cryptoassets and taxation, please email our team on firstname.lastname@example.org.