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What is cryptocurrency and would I pay tax on it?

Crytocurrency has been in the news lately with bitcoin reaching record levels last week then slumping and partially recovering this week. There has been talk of bitcoin millionaires.  But what is it and are there tax consequences?

There are over 2000 cryptocurrencies available. It is possible to hold them as an investment or to trade in them. They are extremely volatile, the value fluctuates wildly. Essentially, you are buying the ‘idea of currency’ an intangible asset and betting on which way the value will go.

You can acquire cryptocurrency, such as Bitcoin, via an exchange or broker by setting up an account online. The cryptocurrency will be held in your digital wallet. You should keep careful records of acquisitions and disposals. You can hold the cryptocurrency as an investment or you can trade which is, effectively, trading on the price of cryptocurrency. You should look into the subject carefully before taking the plunge.

HMRC have identified three types of cryptoasset:

  • Exchange tokens – e.g. Bitcoin intended to be used as a method of payment, provide no rights or access to goods or services.
  • Utility tokens – provide the holder with access to particular goods or services on a platform usually using DLT. A business will normally issue the tokens and commit to accepting them in payment for the particular goods/services in question.
  • Security tokens – may provide the holder with particular interests in business e.g. in the nature of debt due or a share of the profits

HMRC have recently launched a consultation on its regulatory approach to cryptoassets but at present the tax implications are as follows:

Income Tax

If you trade cryptoassets as a hobby then profits arising would not be taxable. If you undertake trading in cryptoassets on a commercial basis with a view to a profit, then the profits would be subject to income tax. If you are in business as a trader and your income is over the lower national insurance contribution threshold (currently £6,475) then class 2 and class 4 contributions could be payable.

Some facets of trading, such as mining and airdrops may be treated as miscellaneous or trading income depending on circumstances.

If you receive cryptoassets as a form of non-cash payment from your employer, income tax is payable on it.

Capital Gains Tax

This is payable on gains arising when cryptoassets held as an investment are disposed of. Where there are multiple purchases of the same type of crytptoasset they can be pooled in the same way that shareholdings are.

Capital losses can be used in the usual way against other gains arising in the tax year with any unused losses being carried forward to offset against subsequent gains.

Inheritance Tax

HMRC have decided that, despite being intangible, cryptoassets held by someone resident in the UK are subject to Inheritance Tax.

It is very important that you keep records of your assets, pin numbers and passwords as they may be needed by your attorney should you lose capacity, or by your executors on your death. If the accounts cannot be accessed the benefit of the funds would be lost to you and/or your heirs. You should also leave letters giving permission for your attorney/executor to access these accounts on your behalf and instructions for them on how to do this.

For assistance with a Lasting Power of Attorney, Will or help with a tax return, please contact one of the team below:

Mamuna Farooq: Direct dial 020 7201 3579          Email: MamunaFarooq@childandchild.co.uk

Kiran Bharj: Direct dial 020 7201 3577                     Email: KiranBharj@childandchild.co.uk

Ella Cullingham: Direct dial 020 7201 1886             Email: EllaCullingham@childandchild.co.uk

Denise Baugh: Direct dial: 0207 201 3575               Email: DeniseBaugh@childandchild.co.uk

Posted By Denise Baugh

5 February 2021

Denise Baugh
Tax & Trust Executive – Private Wealth & Tax