With investments in cryptocurrency becoming more and more popular, we break down the essential tax information that you need to know in order to stay on top of your finances, and avoid being under HMRC’s radar.
‘Crypto’ investments have grown significantly in recent years, with about 6% of the UK population reportedly now owning digital assets such as Bitcoin, Ethereum, Tether, and Dogecoin. Given the potential for significant financial gains—and losses—it’s no surprise that HMRC has taken a keen interest. Estimates suggest that up to 95% of cryptocurrency holders could be non-compliant with tax regulations, putting many at risk of facing penalties if their activities are scrutinised.
In response, tax authorities have ramped up efforts to encourage non-compliant investors to review their tax obligations. One key initiative is the issuance of “nudge letters” to individuals who are known to have disposed of crypto assets, whether by selling, swapping, or gifting them.
Wondering if you’re at risk? Here’s a breakdown of what you need to know to stay on the right side of the law.
When Is Capital Gains Tax Applicable on Cryptocurrency?
If you sell or exchange your cryptocurrency for more than what you paid for it, you’ll likely have made a capital gain, which is subject to Capital Gains Tax (CGT).
For the 2024/25 tax year, individuals are allowed an annual CGT exemption of £3,000. However, with an impending budget announcement on October 30th, it’s worth staying updated on potential changes to this tax allowance.
For gains that exceed the annual exemption, CGT will be due at the following rates:
- 10% for basic rate taxpayers
- 20% for higher and additional rate taxpayers
Do Cryptocurrency Returns Trigger Income Tax?
For most casual investors who buy cryptocurrency to hold as a long-term asset, income tax won’t apply. However, CGT will kick in if your profits surpass the tax-free allowance.
On the other hand, if you’re actively trading digital currencies (frequently buying and selling to make short-term profits), HMRC may classify you as a trader rather than an investor.
The distinction often hinges on factors such as how often you trade. If crypto transactions form a significant portion of your income and take up much of your time, it’s more likely you’ll be viewed as a trader. However, if you have a full-time job and only trade crypto occasionally, it’s less likely you’ll fall into this category.
Should HMRC deem you to be trading, your profits would be subject to income tax instead of CGT. You’d also need to register as self-employed, paying income tax at 20%, 40%, or 45%, depending on your overall income, along with National Insurance contributions.
What About Gifting or Passing on Cryptocurrency Through Inheritance?
If you’re thinking about gifting cryptocurrency or including it in your estate, it’s important to understand the tax implications.
Gifting cryptocurrency can trigger CGT if the asset’s value has increased since you acquired it. The gain in value will be taxed, just like with any other asset.
When it comes to inheritance, cryptocurrencies are treated as property, and their value at the time of death will be part of the estate for Inheritance Tax purposes.
Why Should I Keep Records of My Crypto Transactions?
Maintaining clear records of your cryptocurrency activities is essential for transparency and compliance, especially in the event of an HMRC investigation. Here’s what you should record:
- The date of each transaction
- The amount of cryptocurrency involved
- The value in GBP at the time of the transaction
- Any associated fees
- The purpose of the transaction (e.g., purchase, sale, or gift)
Don’t forget that any taxable gains or income must be reported on your self-assessment tax return. Failing to do so could lead to penalties if HMRC identifies non-compliance during an investigation.
What If My Cryptocurrency Investments Result in a Loss?
If you experience a loss on your cryptocurrency investments, you can offset these losses against your gains to reduce your overall CGT liability.
Make sure to document these losses carefully to support any claims you make when filing your tax return.
Cryptocurrency Tax Compliance: Don’t Risk the Consequences
If you’re involved in cryptocurrency, ensuring tax compliance is vital. With HMRC increasingly focused on tackling non-compliance, failing to follow the rules could lead to significant penalties.
Given the complexity of cryptocurrency tax regulations and the changing landscape, it’s a smart move to seek guidance from a professional who specialises in cryptocurrency tax. Doing so can help you avoid mistakes, ensure you’re fully compliant, and give you peace of mind as you continue to invest or trade.
At Nordens we offer expert advice and assistance with all of your business needs: from your everyday accounting to Advisory, Tax, Audit and more. Book a free consultation today to get expert advice and make sure your cryptocurrency tax obligations are in order!
