Intro

Cryptocurrency has been hitting the headlines for a few years now with more and more users getting started. After years of horror stories and scepticism it’s now trending in a positive light! Only a couple of weeks ago the UK government announced they "plan to make the UK a global cryptoasset technology hub".

Crypto is not only gaining momentum, it is growing acceptance. Worldwide regulation is growing, authorities have realised its potential worth and taxation rules are being put in place.

If they’re not already, soon a flurry of crypto investors will be knocking on your door asking for help. If that sounds a little daunting, then read on to find out how you can prepare...

What is Cryptocurrency?

HMRC refer to crypto as cryptoassets and do not consider them currency or money, their definition is:

Cryptographically secured digital representations of value or contractual rights that have the potential to be transferred, stored and traded electronically

How is Crypto Taxed?

Most of your clients will be classed as Investors, liable for Capital Gains Tax or Miscellaneous Income Tax on their activity.

There are many ways of engaging with crypto - buying/selling, mining and trading derivatives are just some examples of activity. We’ve summarised how the most common crypto activities should be treated for tax below but click here for more.

Capital Gains Tax

HMRC guidance confirms that disposals for CGT include:

• Selling cryptoassets for fiat
• Exchanging one cryptoasset for another cryptoasset
• Using cryptoassets to purchase goods or services
• Giving away cryptoassets to others

Income Tax

Some returns derived from cryptoasset activity is treated as Miscellaneous Income, rather than capital gains, for example trading, mining and staking rewards.

Financial Trading

In exceptional circumstances you may encounter an individual engaged in financial trading in cryptoassets and therefore responsible for income tax and national insurance on their profits. Find out how to establish this in our guide.

Employment Income

Employment income is subject to income tax and NI via PAYE. As HMRC state that employees need to receive an actual sterling payment for National Minimum Wage (NMW) purposes and are also clear that cryptoassets are not money, employer’s may wish to consider paying part of the salary in fiat sterling to cover NMW for their hours worked.

Mistakes, Myths and Misconceptions of Crypto Users

Some crypto users might try to educate you about crypto tax, here's a couple of the common misconceptions...

Myth 1. “Crypto isn’t on record, HMRC don’t know about it, can’t find out about it, can't audit me and therefore there’s no need for me to declare”.

In fact, all crypto transactions are recorded on a public ledger, stored online for all to see. It’s possible to trace paths back to users. Unlike a regular bank account there is some anonymity within crypto, users probably signed up with an email address which could belong to anyone. However most crypto exchanges now comply with Know Your Cusotmer (KYC) regulations and HMRC are asking them for data about users.

Myth 2. “I only need to pay tax when I cash out my crypto”.

All disposals are subject to CGT, not just converting crypto to fiat. This means that every time a crypto to crypto trade takes place, a CGT calculation is needed. For users with high trading volumes this becomes extremely time consuming. Crypto tax calculators like Recap, can help as they keep track of all activity and will source accurate, consistent pricing valuations for assets as well as performing tax calculations.

Users performing lots of crypto to crypto trades unaware of the taxation rules often find they need to “cash out” to cover their tax bill (ironically creating another taxable disposal in the process). You may encounter investors who have made big gains historically but could potentially be hit hard when it comes to back-filing.

Myth 3. “My historical data doesn’t matter”.

It’s actually really important for tax calculations. A disposal may have occurred today, but the asset could have been acquired five years ago and that valuation is needed for an accurate cost basis.

Record Keeping with a Crypto Tracking and Tax Platform

HMRC emphasises the importance of record keeping and states that the responsibility lies with the individual not the exchange. Typically your client will be trading in multiple places so you may find yourself rummaging through multiple spreadsheets and screenshots in order to piece together the puzzle; a waste of your time and billed hours that your client could do without.

Crypto software like Recap solves this issue. Managed by your client, they simply connect their accounts to reconcile all of their transactions. The software calculates the capital gain/loss and income on their activity automatically so they can present you with all of the data you need for their tax return.

Recap for Accountants will be launching soon. You can find out more by booking a discovery call.

Close

The crypto market is growing, creating a new era of investors looking for help with accounting and tax. Crypto tax specialists are extremely rare within the UK, so welcoming these clients could add massive value to your firm. Now is the perfect time to DYOR and get acquainted with crypto.

Disclaimer: This is not accounting or tax advice that can be relied upon for any UK individual’s specific circumstances. All of the sources used in the linked guide are either published by HMRC or the professional opinion of a professional UK tax advisor.