Confused about the tax treatments of Cryptocurrency?
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.
So firstly, what is cryptocurrency?
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).
Are there any laws on taxes for cryptocurrency?
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.
What taxes need to be paid?
HMRC outlined the following rules on taxation for cryptocurrency:
- Income received from mining of cryptocoin will generally be exempt from VAT
- No VAT is due on the trading of cryptocoin themselves in exchange for other currencies.
- Profit made over the value of cryptocoin when trading, will not be subject to VAT.
- VAT will need to be paid when using bitcoin to carry out transactions in return for goods and services.
- Any profit or losses made during exchange of currencies will be taxable, using the general rules on foreign exchange and loan relationships.
- For any companies, this rule would also apply and would be recorded into accounts and applied under normal corporation tax.
- Any profits and losses dealt with cryptocurrency for a non-incorporated business must be recorded into accounts, and normal income tax will be applied.
Capital Gains tax
- Any profit or loss dealt with cryptocurrency are chargeable and allowable on capital gains tax if they apply to an individual
- If applied to a business, they are also chargeable and allowable for corporation tax
Mining cryptocurrency as an individual:
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 cryptocurrency as a Limited Company:
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.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.