Cryptocurrency TAX Rules in the UK (Capital Gains + Income Tax For Cryptos)

[aefx786]

In 2017 we saw the price of Bitcoin soar from $1000 to an All-Time High (ATH) of $20,000 - with other cryptocurrencies making similar gains, it has sparked global interest and in the last quarter of 2017 we saw many exchanges close their doors to new investors due to overcrowding on their servers.

Currently, we are seeing a market-wide correction across all cryptocurrencies, with bitcoin pulling back to $8k and Ripple (XRP) pulling back to $0.65 (it may pull back further yet) - it is a global cryptocurrency firesale and everyone wants to get in on the action before the next price surge - but do you have to pay Tax on cryptocurrencies in the UK?

I've Bought A Bitcoin - Do I Have To Pay Tax?

There is no tax on buying bitcoins or other cryptocurrencies. Your purchase of a cryptocurrency will be tax-free and will remain untaxed for as long as you hold it. However, you may be liable to pay tax when you sell the cryptocurrency.

Selling Cryptocurrency Back To Fiat (GBP)

When you sell your cryptocurrency back to a fiat currency (ie: GBP) and make a profit from the increase in value at the point of sale, you would be subject to Capital Gains Tax (CGT).

Only Your Profit Is Taxable

You're not paying tax on the full amount, you are only paying tax on the realised gains made from the investment. Even then, you have deductions you can make before calculating the final value that is taxable. Britons have a £11,300 tax-free allowance for 2017/18, which means, if your total realised gains for the year are below £11,300 then your profit will be tax-free.

Example 1:
You purchased Bitcoin at £7,000 and sold the bitcoin for £13,500. Your investment gains £6,400 profit. The £6,400 profit is deducted from your tax-free allowance of £11,300 - which means your profit is totally tax free and your allowance for the remainder of the year is £4,900.

Example 2:
You purchased Bitcoin at £2,000 and sold the bitcoin for £13,500. Your investment gains £11,500 profit. Your calculated transaction fees for buying, transferring and selling the Bitcoin amount to £1200. After deducting the transaction fee's, your realised profit from the sale of the Bitcoin is £10,300 and providing you made no other substantial investment gains in the year - the £10,300 will be deducted from your tax-free allowance

Example 3:
You purchased Bitcoin at £1,000 and sold the bitcoin for £14,000. Your investment gains £13,000 profit and after deducting all transaction fee's for buying, transferring and selling the Bitcoin - you are left with a realised profit of £11,900. After deducting £11,300 as your tax-free allowance, you will be liable to pay tax on the remaining £600 profit gained from the sale of the Bitcoin.

Tip: You can "gift" up to £11,300 of assets to a spouse and make use of their Capital Gains Allowance and have a combined £22,600 Capital Gains Tax-Free Allowance annually.

Reporting Capital Gains Profit/Loss

If your realised profits at the end of the year do not amount to more than £11,300 then you don't need to report your gains to HMRC. If your profits amount to more than £11,300 after deducting all costs/fees, you must report it to HMRC as you are liable to pay the tax on the profit gained.

Exclusion: If you sell up to four times the annual allowance (£45,200 for 2017/18) of cryptocurrency assets - then regardless of whether you make a profit or not, you must report the sale of your assets to HMRC.

I Used My Cryptocurrency To Buy Another Cryptocurrency

When you use one cryptocurrency to buy another, you are effectively selling the cryptocurrency you currently own and therefore the same capital gains tax rules will apply as above. However, if you start trading cryptocurrencies and declare yourself as a trader to HMRC you may then be liable to pay income tax.

Advice: If your realised profit will be more than £11,300 - I strongly recommend seeking advice from a financial advisor and most importantly - KEEP ALL RECORDS!

Depending on your style of trading, some traders will scalp the markets and make 10-30 trades a day and over the year this can amount to thousands of trades. Let's say you purchased 0.1 Bitcoin at the start of January and then each month you purchased another 0.1 Bitcoin. At the end of the year you sell your full 1.2 Bitcoins but because you purchased them at different dates, you paid different amounts for them and therefore you need to keep records in order to make sure you are not paying more tax than what is owed.

Treat Cryptocurrencies As You Would Any Other Investment

I cannot stress enough how important it is invest wisely and to keep records of every single transaction. I appreciate that when day trading it can be very tedious to keep track of every single transaction but most popular exchanges do have the option to export your transaction history - so make a habit of exporting a copy of your transaction history.

Don't rely on the exchange to maintain your history

This is still very much an unregulated industry and there is nothing to say that the exchange you are currently trading with, will still be around at the end of the year as enforcements catch up with the rogues - Just look at Bitconnect as an example!!

Always keep your own records of your transaction history - not only for taxation purposes but also to record your asset holdings. You should treat your cryptocurrency investments with respect as you would with any type of investment or business.

I hope this post has been helpful and if it has, please remember to vote & resteem 😉

Comments

[jmsm2]

Thank you for this great post. Really good advice about keeping detailed records and getting professional help where needed. Another suggestion I would add is.....start doing your tax return very early so that you can assess your gains/losses well before the end of the tax year so that you can minimize taxes by adjusting your portfolio accordingly.

If anyone needs to do their UK Tax Return for 2018-19 which involves Crypto tax reports (as an input into your UK tax return), a good company which specializes in this crypto area is TokenTax and can be reached via the following link:
https://tokentax.co/?via=jas