With the value of some cryptoassets, most notably Bitcoin, rising significantly over the last few months, it is inevitable that people will be curious about the tips and traps when investing. There was a popular misconception that the profit or gains arising from cryptoassets transactions are viewed as gambling or lottery type winning and therefore are tax-free. This is not the case, and like any form of asset, there are various UK tax implications from buying and selling cryptoassets. Anyone unsure as to the correct UK tax treatment should obtain advice on their specific circumstances. In this article David Britton, a tax partner at accountancy and business advisory firm BDO, answers some the most common questions currently being asked. This is based on the assumption that the individuals and businesses referred to below are UK based and it does not cover the UK corporate tax consequences for companies.
Do I need to pay tax on my bitcoin / crypto profits, and if so when, and which tax?
In short, the answer is yes. In December 2019 HM Revenue and Customs published their guidance document on cryptoassets for individuals, covering ‘exchange tokens’ (exchange tokens are intended to be used as a method of payment and encompasses cryptoassets like Bitcoin) and HMRC make it very clear that profits from buying and selling Bitcoin and any other cryptoassets are subject to tax.
Broadly, the rules are as follows:
– Anyone buying and selling Bitcoin in an individual capacity is most likely to be subject to UK Capital Gains Tax (CGT) on any gains made.
– For those who are considered as trading in cryptocurrencies (i.e. buying and selling with a high frequency), Income Tax may be due on the profits as trading income. HMRC’s view is that only in exceptional circumstances would it expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade.
– For those who receive cryptoassets as a non-cash payment for employment, there are Income Tax and National Insurance Contributions (NIC) implications to consider as you have with cash payments. For the vast majority of individuals who are buying and selling Bitcoin or other cryptoassets, they are more likely to be within the scope of CGT rather than income tax. However, the facts of each specific case will determine the position.
Do I need to pay Income Tax and NIC if I am paid in Bitcoin?
If you receive cryptoassets from your employer as a payment for services performed in the UK, it is clear that this counts as earnings and income tax and NIC will apply based on the value of what you receive. Crypto assets such as Bitcoin – where there is a tradable market – are considered ‘readily convertible assets’. This means that the primary taxing obligation lies with the employer in a similar way to withholding taxes on a cash salary. This can present administrative difficulties as the value of Bitcoin can fluctuate and some of the Bitcoin will need to be sold to pay a cash equivalent over to HMRC. We have seen some technology companies pay their employees in this way, but it is rarely any more efficient to do so than paying cash. If you are a self-employed consultant (i.e. not an employee), and receive Bitcoin for consultancy work, the responsibility for reporting and paying income tax and NIC lies with the individual via their annual self-assessment tax return.
Do I need to declare my Bitcoin sales on a UK tax return?
It will depend on your personal circumstances. Generally speaking, if you are tax resident in the UK, and you make gains of over your CGT annual exemption (£12,300 for 2020/21) you will need to report and pay CGT via a UK annual self-assessment tax return. If your gains fall within your CGT annual exemption, you may still need to report the gains where the proceeds exceed four times the annual exemption (i.e. £49,200 for 2020/21), or where you have other capital gains or losses. HMRC now receives information direct from UK crypto exchanges/platforms and so not disclosing transactions will most likely result in a HMRC enquiry and could lead to HMRC imposing penalties and costing you more. For example, last year Coinbase, the digital currency exchange, confirmed that it had shared with HMRC details of UK resident users who have used its platform with Crypto transactions of £5,000 or more in the 2019/20 tax year. HMRC has allocated resources to ensuring the tax due on cryptocurrencies transactions are declared through collaboration with their international partners. The J5 (Joint Chiefs of Global Tax Enforcement comprising Australia, Canada, the Netherlands, USA and the UK) are also already sharing information on the use of cryptoassets and foresee more information being shared globally in the coming years in a co-ordinated effort to tackle tax crimes. As a result, we expect to see an increasing number of HMRC enquiries focussing on those who buy and sell cryptoassets. Only last month HMRC commenced a consultation with industry and stakeholders on the regulatory approach to cryptoassets. The aim of the consultation is to create a more agile regulatory framework which supports innovation and competition while reducing risks to consumers. If you are uncertain whether your profits and gains from cryptocurrency should be included on your tax return, or if you have undeclared historic profits or gains arising on crypto transactions, you should consider seeking advice as this is a rapidly developing area of tax.
What should I do if I have failed to correctly report Bitcoin sales?
It is always preferable to make a voluntary disclosure to HMRC to correct errors or omissions rather than wait for HMRC to make contact. This will likely lead to lower financial penalties (if due) and may also reduce how far back the disclosure covers. Whilst the appropriate route to disclosure will turn on the specific circumstances, HMRC do have online disclosure facilities which are likely to be appropriate in most cases where a correction is required.