Learn about the taxation implications of trading in cryptocurrencies We have seen a steady increase over the last few years of clients trading in cryptocurrencies and many have put their head in the sand when it comes to declaring these activities to H.M. Revenue & Customs. This is a dangerous game to play, so this blog will explain your responsibilities in terms of declaring your cryptocurrency transactions and how H.M Revenue & Customs are likely to treat your trading from a taxation point of view.
Cryptocurrency trading is largely unregulated and comes with a considerable element of risk. There are thousands of cryptocurrencies out there and people either trade in these currencies or use them to buy goods and services. The currencies are susceptible to wild fluctuations which can result in massive losses or profits. There is also a risk of fraud, theft and hacking so trading in cryptocurrencies is not for the fainthearted.
So what is the tax position of trading in cryptocurrencies?
H.M. Revenue & Customs have placed a very high bar on this activity being seen as a genuine trade. In determining whether person qualifies as engaging in a trade, they will look at the level of activity, the nature of the trading, whether the individual uses a separate bank account for their dealings and whether the business is being conducted on true commercial terms. The main reason why H.M. Revenue & Customs set the bar so high is, in my opinion, to avoid the taxpayer making substantial loss relief claims.
If we can get through the ‘trade’ test then the activities are subject to income tax or corporation tax and UK GAAP accounting rules apply to the trading – the main implication of this is that we account for stocks held in cryptocurrencies in arriving at profits or losses from trading. Capital allowances can be claimed on assets used for the cryptocurrency business.
If the taxpayer cannot convince H.M. Revenue & Customs that they are involved in a trade then capital gains tax rules apply to gains and losses.
You will incur a capital gain or loss in the following situations: –
1. When you sell cryptocurrencies for real money, say sterling or dollars.
2. When you exchange one cryptocurrency for another
3. When you use your cryptocurrency to pay for goods and services.
When working out your gain or loss on cryptocurrency transactions, the matching rules for individuals follow broadly the same rules as for trading in shares.
There are certain costs which you can deduct from any gains such as: –
a) Transaction blockchain fees.
b) Advertising costs incurred looking for purchasers or sellers.
c) Valuation costs
d) Computer hardware costs used for mining but mining costs themselves are not allowable.
If you receive free tokens or airdrop tokens then these are treated as miscellaneous income on your tax return.
We are aware that H.M. Revenue and Customs are on the attack as far as cryptocurrency trading is concerned. Section 24 Notices have been issued to exchange platforms, requiring them to provide details of transactions to the tax authorities and the number of enquiries are on the increase.
To avoid being caught out make sure that you declare your profits and losses and keep proper records of all transactions.
As cryptocurrency trading is fairly new on the scene do not believe that it falls beneath H.M. Revenue & Customs radar; they are aware of it and on the look out for traders who have not declared their income. Make sure that you keep proper records of transactions and we would advise that you open a bank account specifically for handling sales and purchases of cryptocurrencies.
If you need help in this area we at James, Stanley & Co. Limited are geared up to assist and keep your tax affairs in order. All you need to do is to get in touch.
