Crypto and the taxman – what you need to know

When you start out in the exciting world of crypto investing, it’s likely the last thing on your mind is tax.

Few of us think about tax as often as we should, but while this isn’t normally a problem, ignoring the tax implications of your crypto wallet could lead to some serious (and expensive) issues.

The first thing to know is that cryptoassets are so new that regulation around it is fairly scant and with a definite time lag.

Taxation, on the other hand, is right up to date.

Like with most elements of life, HMRC has a distinct interest in what goes in and out of your crypto wallet. In its view, crypto is just like any other currency or asset – and will be taxed as such.

HMRC also won’t accept that you didn’t know about what tax you were meant to report and pay, so it is worthwhile spending a few minutes with us to see where you might have been liable in the past, or how to avoid being so in future.

To help you understand if you could owe tax, try eToro’s tax calculator – simply add your crypto trades, plus any gains from other assets, and the calculator will work out if you could owe tax. You can then download the file to show to your tax advisor or a tax professional.

Alternatively, listen to eToro UK, HMRC, Deloitte and ICAEW’s webinar on crypto tax, the current crypto landscape and the future of crypto. Or check out our easy-to-understand crypto tax infographic. 

Now, let’s look at all the ways you might be holding, working with or investing in bitcoin.

Trading

Trading is a term that is applied to anything from high-flying city slickers to market stall holders flogging dodgy DVDs. But have you considered that your activity buying and selling bitcoin, litecoin or any of the others may constitute trading, too?

HMRC has considered it - and they are keeping a close eye on those it thinks is carrying it out on a scale that is above the casual investor. It wants to spot all those who are buying at a low price, selling high, then starting all over again in pattern that’s more than just opportunistic.

Why? Income tax.

If HMRC thinks you are buying and selling frequently or in large enough quantity for this to be for anything other than personal tinkering, it could hit you with an income tax bill.

Even though it might not seem like work, HMRC could class any profit made as income, and, just as it does with your monthly salary, it wants a slice of the pie.

For the moment, it has not (publicly) set the threshold for where it considers regular investors turn into traders, but it is something to consider if you’re constantly buying and selling.

Mining

If your laptop and PC are whirring day and night completing the calculations that let crypto transactions be posted in the ledger, you are one of the massive mining community that has sprung up around the world.

Earning crypto through mining can be a lucrative business and takes out the guesswork of trying to time market rises and falls.

However, along with your electricity bills, which are likely to see a spike, there is the possible tax obligation to consider, too.

Despite it being the computer, rather than you yourself doing the mining, HMRC considers this to be work – and any income received from carrying out this work can attract a tax liability.

As with other types of work, expenses can be offset against earnings, but so far it is not clear just how much might be allowed.

Additionally, if you sell a crypto asset for more than it was worth when you mined it, you might be liable for another tax, too: capital gains. This is also the case if HMRC thinks you’re trading (see above) and making a profit it on selling on the asset.

Miscellaneous

Seeing as we have mentioned capital gains tax, it is worth looking into all the ways you might be liable for it when dabbling in crypto markets.

Capital Gains Tax (CGT) is the levy you have to pay for earning a windfall on something. You buy a house for £40,000 and sell it for £400,000 you might be liable for CGT. You are given a battered old Rolls Royce, do it up and sell it on? Get ready for a CGT bill.

It is the same with crypto. If you sell tokens for more than you paid for them, you are likely to be hit with CGT. This is also the case if you are given the assets as a present, earn them from work or mining or even find some in the (digital) street.

While you hold on to them, you’re fine. It’s the selling for a profit bit the taxman is interested in.

The good news, however, is that each year you get a CGT allowance from HMRC – currently £12,000 – that you can take without being taxed. The bad news is that this allowance stretches across all “chargeable assets”.

Offsetting

We touched on it above, but it is well worth looking into how you can offset income or capital gains tax.

Income tax offsetting works pretty much the same way as any salary earned – you might need specialist equipment, training, who knows? – and CGT does too, but there are plenty of useful pointers to take on board.

To offset CGT, you can use any reasonable expense. The cost you incurred obtaining and selling the assets (e.g. advertising, searching) or holding on to it in a secure fashion, for example.

Don’t forget the annual allowable limit (which is for when the gain was incurred, not when you decide to tell HMRC about it), but it is worth having a think about what you can use. Remember also that you can track CGT losses or expenses back over four years.

The small print

Now you know many – but not all – the ways you may be caught out by the taxman, here’s some really important things to remember.

It is your responsibility (UK residents) to report your tax liability to HMRC. And don’t think you can get around it – HMRC often already knows about it. And, as with most things, it’s usually better to come clean rather than be found out.

It is also your responsibility to work out just how much tax you might owe in GBP rather than USD, which is the usual currency pair for cryptoassets. There are calculators available, which hold vast amounts of historical data, so you can go back to the date and time of purchase and sale and work it all out.

As you can see, there is a lot more to crypto than just buying and selling. Get it right and you and HMRC could be friends, get it wrong, and expect some trouble.

Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework. Your capital is at risk.

eToro does not represent any government entity. You should check with a tax professional or HMRC if you are paying the right amount of tax.

Applicable to UK taxpayers only.