By Ashley Preen
April 2, 2018
Cryptocurrency has been in the news quite a lot, and the growing demand is compelling banks and accountants, as well as curious individuals to research into cryptocurrency, why people are investing into cryptocurrency, and the implications investing will have on any taxes and the future.
This blog will tell you exactly what taxes you will need to pay, whether investing individually or investing through your limited company, and the view of HSSR on this matter.
If in doubt, you can always search for a cryptocurrency accountant to help you.
As the name suggests, cryptocurrency is a currency that uses cryptography to secure and verify transactions, as well as to control the creation of new units.
It is a digital currency associated with the internet, with no physical form. Cryptocurrencies are limited entries in a database that cannot be changed by anyone, without fulfilling specific conditions. Cryptocurrency transactions are recorded in a public database, called a ‘block-chain’. A new block (cryptocoin) can only be added to the chain through complex algorithms accomplished by participants called ‘miners’.
Sounds complicated? In simple words, it is an online currency, which can only be gained by completing complicated online tasks, or buying them from other people (exchanging currencies).
Cryptocurrency is independent from any bank or central authority, operated by a peer-to-peer network. There are no set guidelines or laws on cryptocurrency, as it is a new industry and have not been fully tested in any legal cases (yes, its a grey area). However, there are guidelines set by HMRC on cryptocurrency which need to be followed. Fortunately, over time, more and more attention is being given, as the demand grows, and the law on cryptocurrency is to evolve and become clearer.
HMRC outlined the following rules on taxation for cryptocurrency:
Mining cryptocurrency individually would require specialised high-powered computers called ‘rigs’. These can be powered by domestic home supply paid through your personal electrical payment.
In terms of Income Tax, it will only apply if your investment is recognised as a trading activity under the HMRC test – ‘The Badges of Trade’. If it is a trading activity, any profits will be accountable for income tax at the marginal rates. Class 2 and 4 National Insurance will also be charged based on the amount of profit you make per year.
In terms of Capital Gains Tax, HMRC advises that if the activity is seen as an investment rather than trading, they are treated as foreign currency. Any profit you make during conversion between currencies will be held accountable for Capital Gains Tax at the appropriate rates.
Mining through your limited company would mean your company would pay the electricity costs, and the rigs become a company asset.
If you spent over £2,000 on capital assets, you can reclaim VAT, as stated by HMRC using the Flat Rate VAT Scheme.
If the company’s profits and losses are not meeting the category of trading, Non-Trading Loan Relationship and Income expenses would apply, which is subject to corporation tax.
If you need any advice on tax for cryptocurrency, book a FREE Consultation with one of our professional accountants.