Cryptocurrency - HMRC are catching up

As of March 2023, the number of cryptocurrency owners in the UK reached approximately 3.3 million. This number is only set to increase as the types of crypto develop and evolve.​

HMRC have issued guidance about the tax rules around buying, selling and receiving crypto assets, so it’s important to understand the various different types of cryptoassets available.​

Cryptoassets come in many forms. Some of the more popular ones at the moment are:​​

The most common form, and what most people think when of when they hear the term ‘crypto’ – Bitcoin, and other forms of cryptocurrency.​​

This is an individual cryptoasset which cannot be replicated – one of a kind, such as a piece of artwork in digital form. These can (sometimes) go for serious money – check out this collage created by Beeple, sold by Christie’s for US$69m in March 2021. ​

These are two methods where individuals can use their cryptoassets to gain yet more capital, passively. Yield farming involves temporarily lending your assets to DeFi platforms for a period of time, earning interest as you go. It’s similar to Peer-to-Peer lending - you’re making your funds available to others, and you receive interest. The more you lend, the more you earn. ​

The other method, staking, is where you allow your cryptoassets to act as nodes and confirm blocks (not via a DeFi platform), enabling transactions to be made on the blockchain using your assets, rather than additional electricity and processing power. You can stake over a flexible or set period of time (known as locked staking - similar to a term deposit).​

The market has recently taken cryptocurrency a step further by offering the hedging of Bitcoin assets. This includes derivatives such as futures, options, and swaps. ​

Derivatives are very complex financial instruments. Add the many types of cryptoassets being developed and evolving, and it’s likely that trading in derivatives is very high risk.​​

You should be well-versed in Bitcoin and the derivatives market before considering hedging Bitcoin assets. Since this is a relatively new product, we suggest you perform detailed due diligence. This includes:​​

We’ve identified that people will usually fall into one of the trader types below.​​

You will usually have good records from when you started and understand that you have to pay tax on profit.​​

If you’re involved in yield farming or staking, you’re likely to want regular returns on your investment rather than waiting for the pure gain upon sale. Yield farming usually means your cryptoassets are provided via a Decentralised Finance System (DeFi), which should provide you with the detailed records you need for tax purposes.​​

This is where you’re not actually trading crypto – your taxable income shouldn’t be too difficult to determine here, as there will only be a few transactions.​​

If you’re at this level, you’ll have an understanding of the tax implications of Crypto and use specialised software to keep track of holdings and calculate tax.​​

The majority of traders tend to dabble, investing and transferring their holdings on an ad-hoc basis. In our experience, we have found that these types of investors do not always keep accurate records (if any), or understand the tax implications of trading in cryptoassets.​​

As per the HMRC, you are responsible for both preparing your own records and providing them to your accountant at year-end. Your Beany accountant can provide more information on our cryptocurrency addon package, which can be purchased alongside one of our core packages.​

Ultimately, the responsibility lies with you to provide your accountant with the correct information. ​

HMRC have deemed the sale of crypto as a taxable event, triggering the requirement to calculate the profit or loss made on it.​​

A sale or disposal of crypto includes the following:​​

The transfer between wallets of the same type of crypto is not a disposal, and therefore not a taxable event.​​

Tokens received from employment or mining count as income, so you’ll need to keep records and pay income tax and national insurance contributions. You don’t need to pay tax on tokens when you buy them, however, you’ll (likely) need to pay tax when you sell them.​

As for mining, if you’re not trading the tokens they’ll be treated as other taxable income. You’ll need to complete a Self Assessment tax return in GBP (unless you’ve received crypto assets worth less than £1,000, or less than £2,500 from other untaxed income).​

If you receive tokens from your employer, check if they’re classed as readily convertible assets. If this is the case, your employer must pay your Income Tax and National Insurance contributions through PAYE before they pay you. If your employer pays you in tokens, they’ll estimate their value and pay both Income Tax and National Insurance contributions based on this estimate. Your employer will then need to deduct tax and contributions from other wages you receive in that period.​

If your income is not a readily convertible asset, you’ll need to pay Income Tax yourself. To do this, complete a Self Assessment tax return in GBP.​

Capital Gains Tax is a tax you pay when you make a profit from selling certain assets, and your gains go over the tax-free allowance. This tax also applies if you sell your tokens, exchange them for a different type of cryptoasset, use them to pay for goods or services, or gift or donate them (unless it's to your spouse or civil partner). Please note, there are other taxes you may need to pay if you receive cryptoassets.​

To determine if you need to pay Capital Gains Tax, you'll need to determine whether you sell tokens within 30 days of buying them, and if so, work out your gain for each transaction. Your gain is typically the difference between what you paid for an asset and what you sold it for. If the asset was free, you'll work out your gain based on its market value.​

It’s important to note you don't need to pay Capital Gains Tax on the value of the tokens you've already paid Income Tax on, with the exception of the gain made after you've received them. You can deduct certain allowable costs, such as transaction fees paid before a transaction is added to a blockchain, advertising for a buyer or seller, drawing up a contract for the transaction, and making a valuation so you can work out your gain for that transaction.​

You can also deduct a proportion of the pooled cost of your tokens when working out your gain and use capital losses to reduce it. As a reminder, you must report and pay Capital Gains Tax if your total taxable gain is above the annual tax-free allowance.​

To report and pay Capital Gains Tax, you can either complete a Self Assessment tax return at the end of the tax year or use the Capital Gains Tax real-time service to report it right away. You must keep separate records for each transaction, including:​

It’s important to keep records of your tokens, including the type, date received, number of tokens received, number of tokens you have in total, their value in pound sterling, bank statements and the date you disposed of them. You may also want to keep other records such as wallet addresses. HMRC may ask to see your records if they carry out a compliance check.​

Remember, these rules are subject to change, so it’s always best to consult with a tax professional for specific advice on your individual circumstances.​

There’s a lot of information you need to provide your Beany accountant in order for them to accurately calculate your crypto tax position each year.​ It’s important you keep us updated on​:​

As for numbers, we need to have the number (and cost) of coins held at the beginning of each year, as well as the year's ledger from each platform provider, clearly identifying:The year’s ledger from each platform provider, clearly identifying:​

To make things easier, we recommend you use an online platform such as Koinly, which easily helps you keep track of your transactions and holdings.​​

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant world. ​​

We have a dedicated team of certified accountants and a support team to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.​