It is certainly the case that the phrase cryptocurrency is everywhere at the moment. Usually the context is stratospheric rises or catastrophic falls in the value. Others will determine the extent to which such volatility provides investment risks and opportunities but it is important not to overlook the tax issues.
By its very nature cryptocurrency is anonymous and hard to trace which is one reason why the tax authorities are likely to be looking carefully to ensure that all obligations are met. Here is a brief look at some myths and some tips on keeping your tax affairs in good order.
Capital Gains Tax on Cryptocurrency
Since 2012 individuals are not taxable on currency gains and losses so the first thing to appreciate is that cryptocurrency is not an exempt asset as it is not cash held in a bank account. I have seen more than one client under this misapprehension. Any disposals of a cryptocurrency are capital gains tax (CGT) events and tax is payable at 20% if a profit has been realised.
As with any other asset although one may move directly from, say, Bitcoin to Eth, the tax transaction is regarded as a sale of Bitcoin to its then sterling value and an acquisition of Eth at its sterling price. The capital gain or loss is then calculated on the difference between the sterling value at disposal and the value at acquisition.
Virtual Assets Accounting
Record keeping is just as essential with virtual assets as it is with paper ones, whether this is by means of the Wallet or a spreadsheet.
If you are a remittance basis user the place of the asset is critical in determining your liability to capital gains tax. There are various ways of considering this but the nature of the asset is that it is likely to be held on a server outside the UK however you would be wise to check rather than assume. Similar considerations will apply for Inheritance tax if an individual dies holding cryptocurrency it is undoubtedly a taxable asset so the location may be key. As an aside, your executors may need some guidance on how to access it.
Cryptocurrency: trade or investment?
I began by commenting on the volatility of the asset class. It is not uncommon then for investors to move frequently in and out of certain types of cryptocurrency at which point we need to consider whether it is an investment or a trade. Many of the conventional badges of trade and investment are unhelpful as they are from a different age. The distinction, however, remains important; the profits of a trade are of course taxable at income tax rates and the method of relieving losses is also very different. The place of trade may also be different from the site of the assets being traded which again can have affect the tax position.
These points apply equally to corporate and individual investors and in either case the essence is that despite the hype, the ordinary day to day rules of taxation do not go away nor does the anonymity of cryptocurrency remove reporting obligations. If we can help you decipher your tax affairs please do get in touch.