Our Guide to Crypto Tax Accounting
19th May, 2023
The crypto world has developed extremely quickly, causing rules on crypto and tax to become complicated. This is to be expected when delving into the world of digital currencies.
Cryptocurrency has changed the game in terms of assets. If you would like to understand more about the world of crypto accounting and tax rules regarding crypto in the UK, then read on to learn more.
Introduction to Crypto
Crypto is short for cryptocurrency and is a digital currency. It is designed to work through a computer network exchange and does not rely on any authority to maintain or upload it like other currencies, such as from a government or bank.
Different types of cryptocurrencies exist. They can be used to secure transactions online. Cryptocurrencies are essentially digital tokens and have legislated or intrinsic value. They are worth the value people pay for them at any given time. This makes them an uncertain type of currency with more risk attached when dealing with them.
Do You Pay Tax on Crypto?
The answer is yes, you do have to pay tax on crypto. Legitimate crypto investments will be closely observed by tax regulators.
Cryptocurrency isn’t considered real money by key financial institutions and often holds an underhand reputation. This causes crypto assets to be treated like shares as they cannot be seen and counted as real currency. They will be taxed as shares accordingly.
Non-UK residents can expect to receive more favourable tax rules when it comes to cryptocurrency and tax.
When Is Tax Paid on Crypto?
There are instances where certain activities that you are involved in regarding your crypto assets, will be subject to tax from HMRC. Find out in what instances you will be taxed for your crypto assets down below.
Buying and Selling
Like with any asset, as crypto assets are treated like shares there is a tax to be paid when you come to buy and sell your crypto assets.
You will pay out a capital gains tax if you sell crypto assets and make a profit on them, you will be taxed on that profit.
If you have happened to have taken a loss in your finances through trading your crypto, then your losses in these instances could minimise your capital gains tax bill.
Trading crypto in large amounts will flag to HMRC that you are a trader. This may trigger you having to pay trading income tax, rather than your capital gains tax.
Swapping Crypto
Swapping cryptocurrencies will activate a taxable capital gains event. This will depend on how long you have held your asset for and how much you will earn from it.
Getting Paid in Cryptocurrency
Being paid an income through crypto, will not allow you to dodge taxes on them. This is regardless of the type of cryptocurrency you are being paid in, you will pay Income Tax and National Insurance contributions on your crypto income like you would with normal earned income.
Crypto Inheritance
If you happen to inherit crypto assets as inheritance, they will get treated as property by HMRC by UK tax law. This is for inheritance tax purposes and the assets will be subject to the Inheritance Tax rate of 40% if the estate exceeds the £325,000 tax-free threshold.
Mining
Mining is the process of a global network ensuring that crypto transactions are legitimate and added to the blockchain. This can be a profitable way to make money with crypto.
If you are crypto mining as a business then the mining income will be added to your business’ profits as trading profits and therefore be subject to income tax and National Insurance. If you gain value from trading it will be adding to your trading profits and could be subject to National Insurance.
Crypto mining as an individual and for a hobby then you must declare under miscellaneous income when you file your tax return.
Your fees or rewards received from your crypto mining will be added to your income that is taxable. You could subtract the appropriate expenses before it is counted as your taxable income, however, it will still be exposed to capital gains tax when you come to trade this crypto.
Staking
Crypto staking involves pledging your cryptocurrency towards helping validate transactions on the blockchain. It can have possible benefits as it holds the potential for people to earn a passive income.
Any tokens that are awarded from staking crypto will be classed as miscellaneous income and be taxable. You can treat this as savings income and claim a personal savings allowance to reduce taxes. Speak to us further about this as capital gains tax rates may apply if you dispose of crypto at a later date.
Airdrops
Airdrops are free tokens that are divvied around in an unsolicited distribution of cryptocurrency to numerous wallet addresses. Income tax will only be eligible on airdrop crypto if they are received by doing an exchange, or if they are not accepted as a business or trade that involves crypto.
You will have to pay tax on your airdrops if they are received for doing a job or providing a service. In cases of this, income tax can be applied as they will be classed as trading profits or miscellaneous income.
Haggards Crowther Can Help
Haggards Crowther is a family-owned accountancy firm that has all the latest knowledge and experience to help you deal with your crypto assets and investments.
We look forward to helping you with our expertise and advice on how to best manage your crypto assets to be the most tax efficient with them.
At Haggards Crowther, we can help you with lots of tax management services, for your individual accounting needs, or your business finances. We are a fully equipped firm dedicated to helping you reach your goals.
Browse our website for more details about the range of services that we provide. If you need to get in contact with us then do not hesitate to get in touch, where we will be able to discuss further what we can do for you.
Terry started life at HM Revenue and Customs before moving to Ashdens and then on to BDO and Chantrey Vellacott, the combination of which has provided Terry with a wide breadth of experience which has proved invaluable when helping a broad range of clients with their tax affairs.
Whether it involves meticulously organising a client’s tax affairs or leveraging his expertise to mitigate their tax exposure, Terry has a passion for delivering tangible results.
