Tax Pressure is Increasing on UK Crypto Investors

A cryptocurrency is a decentralized virtual currency that is protected by cryptography and exists on a distributed ledger called the blockchain.

While all digital and most virtual currencies are centralized with supply controlled by the developer of the currency, cryptocurrencies such as Bitcoin are decentralized and not created or controlled by a single central entity. Therefore, the supply and value of a cryptocurrency is determined by demand.

Blockchain technology refers to a structure that helps store transactional records or blocks in databases, known as the “chain,” in a network of peer-to-peer node connections. This makes counterfeiting and double spending of cryptocurrencies virtually impossible. This storage is typically referred to as a “digital ledger.”

There is a distinct difference between digital banking and cryptocurrency. While both are electronic forms of asset exchange, digital banking offers a platform with which to view your assets and access your bank account held within the bank’s servers. Money held in an account has a physical equivalent in the real world, such as notes which are recognized as “legal tender.” However, cryptocurrency is owned and controlled entirely by you, in your own eWallet.

Businesses all over the world are integrating blockchain technology as its potential becomes more apparent.

UK Tax Implications

Following a Freedom of Information Request, the UK tax authority HM Revenue & Customs (HMRC) is reported to be working alongside leading cryptocurrency exchange platforms to gather personal information of users. It has taken this action with the sole purpose of prompting investors to be mindful of tax implications that can occur when dealing with cryptocurrency assets. As a result, investors can now expect to receive “nudge” letters from HMRC, reminding them to pay their taxes correctly.

Treat Crypto Profits the Same as Fiat

It seems as though there is now mounting pressure on investors. For UK tax purposes, crypto assets are usually subject to capital gains tax on any profit realized for individuals who hold them as personal investments.

Investors also need to be aware that there are instances where, if an individual is seen to be trading, “mining,” or receives crypto as part of an employment remuneration package, then any profit could be open to income tax. As with any asset, if there has been no disposal of the cryptocurrencies, there usually is not any tax due, as you only pay taxes in the UK on realized profits.

A disposal for UK tax purposes may occur if cryptocurrencies are sold for cash, used to buy other assets with a value, or exchanged for another cryptocurrency. By way of example, if you have exchanged a token from one platform to another platform (e.g. Bitcoin to Ethereum), this would be a disposal for UK capital gains tax purposes and a re-purchase at the market value at the date of the new token.

Protecting Your Business—Avoiding Penalties

Business owners also need to be aware that receiving a cryptocurrency in payment for goods or services sold by your business requires you to bring the value of the cryptocurrency into your sales/turnover. The same value forms the purchase cost of that cryptocurrency for a future sale of it.

There are some special rules, referred to as “bed and breakfasting,” that apply for selling and buying the same cryptocurrency within 30 days.

We would argue that anyone investing in cryptocurrency needs to be careful when calculating the profits/losses arising from the disposal of cryptocurrencies. HMRC receives information from crypto exchanges and will pursue those persons who fail to report their profits correctly. Penalties for failing to report gains can be quite severe.

Overcoming Challenges when Declaring Funds

Investors may face some difficult issues when it comes to reporting, which is almost entirely based on the problems around calculating potential gains or losses.

Cryptocurrencies are subject to major price volatility in the market, and this can result in significant gains or losses. Furthermore, some individuals undertake a large number of transactions each tax year, which can make it difficult to keep accurate records.

In addition, cryptocurrency exchanges may only keep records of transactions for a short period, or the exchange may no longer be in existence when an individual comes to evaluate the position. Therefore, we advise that records be saved by investors as soon as possible.

UK tax rules also dictate that specific ordering rules apply to tokens purchased and sold within the same token across multiple wallets via a pooling method, and tokens need to be converted into pounds sterling at the time of each transaction and their market value ascertained. For example, an individual that has multiple wallets across separate trading platforms, containing the same token (e.g. Bitcoin), would need to calculate these together to work out any potential profit/loss on disposals.

Finally, the tokens need to be converted into pounds sterling (as most are priced in US dollars) at the time of each transaction (purchase or sale), and their market value needs to be ascertained.

Recording Transaction History

Individuals must keep a record of the type of crypto asset, the date of the transaction, if cryptocurrency was bought, sold or exchanged, the number of units involved, the value of the transaction in pounds sterling (this is the market value in pounds sterling at the date of the transaction), the cumulative total of the investment units held (as well as the cumulative cost) and bank statement and wallet addresses, in case these are needed for an enquiry.

These are records that should also be kept and produced in the event of a financial review. They form part of the audit trail from acquisition to disposal—they are therefore evidence of any gains/losses made.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

William Je is the Chief Executive Officer of Hamilton Investment Management Ltd, a global fund manager, and also the founder of Himalaya Exchange, a global digital exchange with a full ecosystem including a mobile payment app, a stablecoin and a trading coin. Mr. Je was previously Chairman of Equity Capital Markets, Greater China, at the Macquarie Banking Group for 10 years, managing its Greater China capital markets and principal investment activities.