There is no denying that cryptocurrencies have grown in popularity. In 2021, we saw Bitcoin reach new highs while other cryptocurrencies are also giving investors the chance to make some excellent gains. Of course, as with all investments, there are ups and downs but some people have made a lot of money from cryptocurrencies but do you need to pay tax on them?
So, you will need to pay tax on any gains although any losses can come as a slight benefit. In the UK, individuals that make gains from cryptocurrencies will need to pay tax as part of the capital gains tax regime. The amount of tax is calculated by taking the amount of proceeds in Sterling and deducting the cost in Sterling.
It’s Not All As Simple As It Seems
If you have made a one-off purchase of cryptocurrency then this is relatively simple. However, many people tend to purchase holdings of cryptocurrencies at different times and they are worth different amounts. They then sell them at different times and so, in order to identify the cost of value of cryptocurrency that you have sold, you will need to use the share matching rules that HMRC put in place.
It can also be challenging to identify disposals. Should you make the switch to another cryptocurrency after holding another, then you have disposed of the original cryptocurrency. This will then mean that you have either a loss or a gain on that disposal and that cannot be passed onto the new cryptocurrency.
Should you choose to pay for services or assets using cryptocurrencies, then this is considered to be disposal of the currency and is also taxable. Furthermore, if you choose to gift the currency, then this could also lead to a taxable disposal.
Another challenge is taking the rate of the sales and converting that into sterling. It’s not an easy task while not all expenses are considered tax deductible and so, cryptocurrency sales are not easy when it comes to accounting because they can be complex and expensive to get right.
There Is Good News
However, there is a chance that you won’t have to pay any tax but to determine this, you will need to consider the total of all of your chargeable asset disposal.
As an example, if all of your cryptocurrency disposals for the 2020/21 tax year amount to less than £49,200 and gains are lower than £12,300, you won’t need to report your cryptocurrency disposals. You will need to report if you need to claim a capital loss. If you go beyond the limits, then the disposals will need to be included on your self assessment tax return and pay the required capital gains tax. The rate will be set at either 10% or 20% or it can be a mixture of the two, depending on how much you have earned during the year of disposal.
There are many things to consider when it comes to cryptocurrencies. So, it helps to seek out professional advice to ensure that you accurately record purchases and disposals and pay the required tax.