In January I completed and filed my 2016-2017 UK self-assessment tax return, for which I had to consider the tax implications of my cryptocurrency holding and trading. While I was able to convince myself that there were no issues for that period, since I had sold no cryptocurrency (only bought) in that period, it was clear that I would definitely need to consider tax in detail for the upcoming 2017-2018 period.
My first step, back last summer, was to invest in a cryptocurrency accounting app known as CoinTracking.info. I have used it carefully since to record all transactions, but nonetheless it was clear that while it could help with tax filing, it was necessary for me to research and understand the issues myself.
The tax situation in the UK for cryptocurrency is unclear so here I’m going to record my views on the current situation – if anyone knows otherwise, please detail any corrections in the comments.
The main guidance we have from HMRC dates back to 2014 and hasn’t been updated since. It is known as Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies, and I will give my interpretation of it here.
In a nutshell for an individual (not a company) with a moderate amount of cryptocurrency (less than £45k) it is as follows:
- Capital Gains Tax (CGT): If you buy and sell cryptocurrency then you are liable for capital gains tax on the difference in value of the currency between when you bought it and when you sold it, valued in pounds sterling. Where this exceeds the CGT tax-free allowance (£11,300 for 2017-18) there is tax to be paid.
- Income Tax: If you trade or mine cryptocurrency then you are liable for income tax on the value of the currency gained, valued in pounds sterling. Where this exceeds the income tax personal allowance (£11,500 for 2017-18) there is tax to be paid.
- Value Added Tax (VAT): In virtually all circumstances VAT can be ignored (as with most conventional currencies).
While the guidance suggest that on a case-by-case basis some cryptocurrency transactions may be considered to be gambling or betting – and therefore not taxable – I will assume that the safest course is to assume that, if reviewed, all transactions will turn out to be taxable on the basis just described.
Note that, in my opinion, income tax is probably liable on any free gains of cryptocurrency, for example:
With regard to CGT, it looks like cryptocurrency will be valued in the same way as shares. If you have bought and sold lots at different times then the value of what you sell compared to what you paid for it can be difficult to calculate – how do you match which sold Bitcoin to which bought Bitcoin?
Following HMRC guidance for shares the process is basically:
- Same Day Rule: If you buy and sell on the same day then the coins can be matched off against each other (even though you bought and sold at different values) and there is no CGT liability. You just have to consider CGT on any ‘left over’, i.e. if you sold more than you bought.
- Bed and Breakfasting Rule: Any coins not covered by the first rule but bought and sold within 30 days can be matched against each other, and CGT is due on the difference between the buying and selling values.
- All others: Any coins not covered by the first and second rules are considered to be held in a single pot (called a ‘Section 104’) and when some are sold they are valued at their proportion to the value of the total pot. That value is determined by adding up the bought price of the coins in the pot.
That’s the tax situation for cryptocurrency as I understand it so far, though of course I will look into it further in time for my next tax return. With that return in mind, I have decided to do some specific bookkeeping in advance (probably in spreadsheets) and if you own crypto you might want to consider doing something similar:
- Track the buying and selling of all crypto coins to pounds, with dates, in order to determine the CGT liability as per the 3 rules just described.
- Track the receipt of any free coins (including airdrops, forks and faucets) in order to determine the income tax liability – even if (particularly if) the coins ended up in the same account as those that were paid for.