Income Tax? Corporation Tax? Capital gains tax? VAT?
The taxation of profits from buying and selling cryptocurrencies is more than likely going to fall in to one of these three tax heads. In deciding which one, HMRC have said this must be considered on a case by case basis. For an individual to be subject to Income Tax (or a company to be subject to Corporation Tax) on cryptocurrency gains, there needs to be evidence of a trading business. To decide if this is the case, HMRC say that badges of trade must be present.
Not all of these “badges” need to be present in order for a trade to exist. It’s only when you look at all the badges that are present in the context of the activity that you can decide if you are trading in cryptocurrencies or investing in them.
The biggest potential risk is that some people will make vast amounts of gains from cryptocurrencies, HMRC deem them to be trading, and end up being hit with the top rate of income tax on their earnings (currently 45% plus 2% National Insurance). At the highest rate of tax, individuals also lose their tax-free personal allowance.
For this reason, it’s worth looking at your activity now, assessing the likelihood of being deemed to be trading, and if you are, consider moving your cryptocurrencies into a Limited Company where lower overall rates of tax apply. If the profits are in a company, some effective tax planning can make sure you hold on to more of your gains.
For those that are investing in cryptocurrency, these gains will be subject to Capital Gains Tax (CGT). Every individual has an annual exemption of £12,300 (for 2021/22 tax year). Any gains over and above that amount will be taxed at either 10% or 20% depending on your other income in that same tax year.
In most circumstances CGT will be the main tax applicable to gains from cryptocurrency but it will really depend on each individuals own circumstances.
The buying and selling of Cryptocurrencies are outside the scope of VAT. But services connected with cryptocurrencies will be subject to VAT in the normal way. Examples include consultancy, settling debts with cryptocurrency, purchasing goods with cryptocurrency HMRC first set out their stance on cryptocurrencies back in March 2014 with the publication of Revenue & Customs Brief 2014 (9). Since then, they have remained largely silent on the topic.
As would have been expected, the buying and selling of cryptocurrencies are outside the scope of VAT. Services provided connected with trading in crytpocurrencies, such as consultancy services, will be subject to VAT. HMRC also clarified that just because a transaction is settled in a cryptocurrency, this does not mean that the underlying supply is not subject to VAT. This means buying goods and services using Bitcoin, doesn’t mean VAT shouldn’t be charged in the normal way. As with any other transaction, the pound value is the equivalent of the market value of the cryptocurrency at the time of the transaction.
Transfer between spouses is currently exempt from CGT. This means that assets can be transferred between husband and wife or civil partners so that both annual CGT allowances are used. This effectively doubles the CGT allowance for married couples and civil partners. The transfer must be a genuine, outright gift.
Gains and losses established in the same tax year must be offset against each other, so this will reduce the amount of gain that is subject to tax. Losses must be registered with HMRC within four years from the end of the tax year in which the loss has occurred. You’re allowed to deduct certain
costs involved with buying and selling (incidental costs of acquisition and disposal) Crypto Assets from your gain when working out your CGT liability. These include: transfer fee, exchange fees, and fees for professional service such as lawyers and accountants relating to the buying and selling the crypto.
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