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Understanding how much tax you need to pay on your Cryptocurrency can be confusing and complex. HRMC are clear on what is owed and making a mistake can be costly. Continue reading to find out 5 things you need to consider when paying tax on cryptocurrency.
1. Understanding your tax treatment
Not just buying and selling
You need to report your taxes when you sell cryptocurrency for a gain. This also applies if you exchange your crypto for goods and services (spending crypto via debit/credit card) and includes exchanging your crypto for another crypto.
Earning crypto
Any Crypto you earned from staking, mining, earning wages, interest, DeFi income, airdrops, forks), this is included in your taxable income. How much you pay is determined by the market value of the date you received payment and the type of payment. Cryptocurrency received from an employer is treated like any other wage, in this case income tax and national insurance payments also apply.
Gift and donation
Giving away your cryptocurrency as a gift or donation is treated as disposal. You are responsible for paying tax on any gain you’ve captured. You may be able to claim income tax relief on qualifying donations made to approve charities. Special rules apply for gift of crypto asset to your spouse.
You and your spouse or civil partner are treated as separate individuals for Capital Gains Tax purposes. Each of you will pay tax only on your own gains and you will get relief only for your own losses. However, any transfer of an asset between you is treated as giving rise to neither a gain nor a loss to the person transferring it.
2. Keep record and report
Expect the taxman to take a hard line with compliance around cryptocurrency tax. In recent years, HMRC has been cracking down on unreported transactions.
Failing to report income or any gains can carry hefty penalties and interest. Guidance on cryptotax has been available for some time, and HMRC take avoidance seriously.
It’s common for people to have multiple crypto exchanges, complex transactions such as margin trade and derivatives, Difi and NFT , which make calculating tax payments challenging.
It it therefore advisable to seek professional help, if you’re unsure about how much you owe.
3. Accurately calculate the taxes.
When you determine your tax liability, it’s important to consider what type of transaction is taking place (e.g. a sale, exchange, use or gift) and what tax is applicable (income tax or CGT). Cryptocurrency received needs to be identified separately to work out how much income tax is due.
In some cases, you can deduct expenses from your gain, such as the cost of buying and selling. Special rules apply on the cost basis, allowable cost or the value of the disposal proceed. It is vital your tax calculations reflect every variable to ensure you are paying the full amount owed.
4. Take advantage of tax reliefs to reduce your tax
Make use of personal allowance
Everyone has a personal Capital Gains Tax (CGT) allowance, every year (2023-24, £6,000). For many crypto investors this allowance is sufficient for avoiding a CGT liability.
If you spread disposals over the tax year, or transfer a percentage of your cryptocurrency to your spouse, you’re entitled to use the tax-free allowance twice.
If your allowance is unused, it cannot be carried forward into the next tax year or transferred to anyone else.
Claim losses
You can deduct “allowable losses” from any gains made in the same tax year. It might be wise to sell some assets at a loss if the overall gain in the tax year exceeds the annual allowance. If you make a loss in one year, but do not have profits to set it against, you can carry it forward to future tax years.
Negligible claim loss If you own cryptocurrency which have become worthless since you acquired it, you can make a negligible value claim. The effect of the claim is to treat the cryptocurrency as
having been disposed of for nil disposal proceeds and reacquired with no acquisition cost. Any loss resulting from the deemed disposal can be utilised to minimise the tax liability.
5. Own up to it before too late
If you have failed to report income or gain on your past returns or filed an incomplete or misleading picture of your cryptocurrency gain, the time to act to correct this is now.
Once HMRC has prompted you to report your tax, or if an investigation has begun, it is too late to amend your returns and take advantage of voluntary disclosure.
MyCryptoTax are professional accountancy firm focused on crypto tax. Their team of qualified accounts have the knowledge and expertise to ensure your crypto taxes is are filed correctly and you only pay what you owe.
To find out more visit https://mycryptotax.co.uk .
If you would like to speak to one of our team, give us a call on 02033021919 or email [email protected].
We are here to help keep your crypto investment secure.