What is cryptocurrency, and what are its tax implications?

Cryptocurrencies are a form of digital or virtual currency. There are various types of cryptocurrencies and more are being introduced all the time. 

Cryptocurrency is denoted in terms of ‘tokens’, and are treated as an investment , which can increase or decrease in value. 

At present cryptocurrencies are not widely accepted as a way to pay for items. 

Unlike a bank account, which is in the holder’s name, a cryptocurrency’s ‘wallet’ name is made up of numbers and digits. This private key is only known to its owner, and it cannot be traced to an individual. When entities are hacked, the ransom is usually requested in a cryptocurrency as it is hard to then track the hacker.

And, unlike bank notes, which can be fraudulent, a cryptocurrency cannot be fraudulently produced.

Volatile value

The value of the cryptocurrency is extremely volatile. As an example, when Tesla announced that they would accept cryptocurrency as payment for their cars, the value of one variant, Bitcoin, shot up. When it was then announced that this would not be possible after all, the value dropped dramatically. 

Is buying cryptocurrencies taxable?

There are no taxes on buying cryptocurrencies in the UK, and you can hold them for as long as you want. You should still keep records of these transactions, however, so that you can deduct the costs when you eventually sell them.

Selling cryptocurrency

If, as an individual, you decide to invest in cryptocurrency, you should keep a note of the date you purchase it, and for how much. 

When you then decide to sell the cryptocurrency, and materialise your gain, you must ensure you keep a record of the profit made, as these are liable to capital gains tax. If you are a higher rate tax payer, you will pay tax at 20% of these capital gains. Each different cryptocurrency is seen as a separate capital gains tax asset. You are entitled to use your capital gains annual allowance against these gains, unless you have used it elsewhere. 

Exchanging and gifting

HMRC confirms that exchanging one cryptocurrency for another also constitutes a taxable event. This means you are disposing of a capital gains tax asset and acquiring another one. The market value of the cryptocurrency that you receive is considered to be the sales price for that transaction. 

If you should pay for goods or services using cryptocurrency, HMRC treat this as the sale of the asset. 

Gifting cryptocurrency

If you gift someone cryptocurrency, this is treated as a disposal. A market value would need to be calculated and capital gains tax may be payable if a profit is made. 

Income tax

However, if HMRC believe that you are regularly trading in cryptocurrency, they can deem these to be income and not capital in nature. If this is the case, you would be liable to income tax and not capital gains tax.

In summary

Ensure you always keep accurate records of cryptocurrencies that you buy, sell or give away, to ensure you pay the correct tax. 

Please always seek professional advice. before taking any action. We are happy to answer questions in future issues. Please send your questions through the contact us page on our website: www.champconsultants.co.uk 

Chantal Baker, is the director and founder of Champ Consultants Ltd, an accountancy and tax consultancy practice in Caterham. Please follow us on our various social media channels. 


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