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Taxation of Cryptocurrencies

Posted: May 17, 2021
Posted: 17 May 2021

Cryptocurrencies have become well publicised once again, having grabbed plenty of media attention during the bull run in 2017, with Bitcoin rising to around $19,800. Throughout 2021, Bitcoin has continued to record all-time highs, with the greatest price being recorded on 13 April in excess of $63,000 per bitcoin.

It is not just Bitcoin that has seen such astronomical rises in price however, with much of the alternative cryptocurrencies recording even greater gains in percentage terms.

Currently, HMRC do not see cryptocurrencies as an actual currency or gambling. It is instead treated as an asset and as such, are subject to the rules of Capital Gains Tax unless you are trading. It would be very rare for an individual to be considered trading and our tax experts would be happy to assist you in determining your status.

Capital Gains Tax applied to Cryptocurrencies

You only make a gain on your crypto asset once you sell it for fiat currency, or swap it for another cryptocurrency. This includes the ‘wrapping’ of tokens.

To work out a gain on your crypto asset, you will take the proceeds received on the sale and deduct any costs to make the transaction (i.e. gas fees or exchange fees). This gives your net proceeds.

You then deduct your cost from the net proceeds. In working out the cost, we need to regard the share matching rules. In order of priority these are:

  1. If an individual disposes of cryptocurrencies, he is deemed to have sold any he acquired on the same day
  2. Next, the shareholder is deemed to have sold any cryptocurrencies he acquired in the following 30 days.
  3. Finally, the disposal will be matched with all other share acquisitions which are pooled together and form one assets for CGT purposes – the s.104 pool.

If you believe that your gain exceeds £12,300 or alternatively that your total proceeds from selling/swapping tokens will total greater than £49,200, then you would be required to submit a Tax Return. Burgess Hodgson can assist you with preparing your Return ascertain your tax liability.

If you farm or stake your crypto

In both of these situations, you are using your crypto to obtain more crypto or it is being paid directly in Fiat currency. HMRC guidance suggests that any cryptocurrencies earned in such a way is treated as miscellaneous income and is therefore subject to Income Tax.

The amount that is subject to Income Tax is then used as part of your cost basis when you dispose of the asset in question.

Non-Fungible Tokens (NFTs)

NFTs are slightly different in that they are minted to become part of a blockchain. This ‘minting’ process allows an NFT to be recognised as truly unique and has opened up a market of digital collectibles.

As each NFT is one of a kind, you cannot pool them together like with other crypto-assets. The Capital Gains Tax rules should still apply and any proceeds you receive from the sale of an NFT could be subject to the chattel rules. If the NFT is purchased and sold for under £6,000, there is no reporting obligations. However, if a sale takes place over this amount, please consult your tax advisor.

If you create and sell NFTs, you may be trading and any such profit would be subject to income tax. Burgess Hodgson would be happy to assist in determining your status. Please contact tax@burgesshodgson.co.uk with any questions or for assistance.