Too often in conversation have I heard false statements like “cryptocurrency is only taxable when you convert to cash.” As part of the process of becoming a legitimate and accepted asset class, governments are becoming increasingly involved. It is important to understand tax that may be applicable on your Cryptocurrency. Failure to report taxable income and capital gains could result in serious consequences.
While we are not qualified to provide financial or tax advice, this article will provide a summary of cryptocurrency tax in the United Kingdom as we understand it. If you are looking for tax advice we recommend contacting a qualified tax advisor or reading Her Majesty’s Revenue & Customs (HMRC) page on crypto-assets for individuals where we have sourced our information.
HMRC treats cryptocurrencies differently depending on the user’s intentions and actions however by default cryptocurrencies are treated as a personal investment. HMRC goes as far as to say that even users who classify themselves as “traders” under normal circumstances are treated the same as passive investors in that any change in value will be taxed under capital gains rules when a cryptocurrency is disposed of.
Under normal circumstances, you can hold your cryptocurrency for as long as you would like and do not incur any tax until you choose to dispose of it. When you dispose of a cryptocurrency, either by selling it, gifting it, exchanging it for another cryptocurrency, or even spending it, any increase or decrease in fair market value becomes taxable as either a capital gain or capital loss.
Example: if you buy £10 of Bitcoin then over the course of the following month this increases in value to £15 before you sell the cryptocurrency, you should report the full £5 as a capital gain.
Under UK capital gains rules, tokens of the same type can be grouped together for capital gains purposes. This reduces paperwork for users by allowing them to track acreage prices of cryptocurrencies rather than tracking each acquisition price. In order for cryptocurrencies to be grouped together, they must be the same type of cryptocurrency and you must have owned them for longer than 30 days. If you buy and sell a token within 30 days it will be treated individually and cannot use the average cost basis.
HMRC allows users to realise capital losses for cryptocurrency without disposing of it if the cryptocurrency becomes worthless or of ‘negligible value’. This rule also allows users to realise capital losses if they can prove that their cryptocurrency has become inaccessible and there is no hope of recovery. This rule is not available for users who suffer from hacking, theft, or have misplaced their secret keys. These events are seen as the risks of investing in cryptocurrency and there is no rule to allow the losses to be realised.
Mining, Staking, and Other Rewards
When you receive cryptocurrency rewards for holding a token, such as interest, staking rewards, mining rewards, or any other type of reward, cryptocurrency you earn will be treated as income at the value in GBP when you receive them.
Example: if you receive a staking reward today equal to £10 you should record the current value in GBP (£10) and report this as income on your annual tax filing.
If you choose to hold cryptocurrency after receiving it, any future gains or losses will be treated according to capital gains tax rules.
Example: if you receive a staking reward equal to £10 then over the course of the following month this increases in value to £15 before you sell the cryptocurrency, you should report £5 for capital gains while the initial £10 is reported as income.
HMRC excludes costs for mining activities from being included as allowable costs and deducted from income because they are not seen to be wholly and exclusively to acquire the crypto assets. If you conduct a mining business different rules may apply. While this article is intended for non-business users you can find additional information by reading HMRC’s page for businesses Tax on crypto assets.
HMRC treats airdrops differently than other types of rewards. Provided that the user received the airdropped cryptocurrency “without doing anything in return” there is no applicable tax at the time of receipt. In this circumstance, the cryptocurrency would be taxed in full at disposal under capital gains tax rules using a cost basis of zero.
Example: if you receive an airdrop reward equal to £10 then over the course of the following month this increases in value to £15 before you sell the cryptocurrency, you should report the full £15 for capital gains nothing is reported as income.
Hard forks occur when a cryptocurrency chain splits into two distinct chains, normally following a disagreement between users resulting in two separate cryptocurrencies: the original and a new cryptocurrency. Notable examples include bitcoin, which forked into bitcoin cash, and Ethereum Classic, which forked to become Ethereum.
During a hard fork, there is no taxable event. The original cost of the cryptocurrency is split between the new and the old. Each cryptocurrency will be treated under capital gains rules at disposal using the new cost basis.
Example: you bought £10 of Bitcoin in 2017 before the hard fork. After the hard fork, you now own both Bitcoin, and Bitcoin Cash. For tax purposes, the cost of each of these cryptocurrencies will be £5 (£10/2). Assuming that a year later your bitcoin cash is worth £3 while your Bitcoin is worth £15. If you were to sell both you should report a capital loss of £2 (£3-£5) on your bitcoin cash and a capital gain of £10 (£15-£5) on your Bitcoin.