Bitcoin, Ripple, Litecoin…

The list of cryptocurrencies goes on and on. With brand new currencies popping up almost daily, it doesn’t look like the craze is going to end anytime soon.

With stories spreading of sizeable gains being made relatively easily on short-term investments, it’s not surprising we’re seeing far more queries come in about this kind of investment option, and how profits made will be taxed.

But there are some important things to be aware when you’re considering investing in a cryptocurrency, so we’re going to give it to you straight!

1. You need to see cryptocurrency as physical cash

As opposed to seeing cryptocurrency the same way you see your bank account. What we mean by this, is that there is no ‘bank statement’ that can be traced to keep track of the movements of cryptocurrency. You will need to keep your own records, to avoid any potential fines from HM Revenue & Customs (HMRC). And we recommend keeping your records up to date at the time of each cryptocurrency transaction.

2. The records you keep will depend on your purpose

Inevitably, the next question you’re likely to ask is ‘well, what records do I need to keep?’. And this really depends on what the purpose of your involvement in cryptocurrencies is. If you’re using it for leisure, and simply spending your cryptocurrency on everyday online purchases, then there’s no need to keep any record of your transactions. If you’re using your cryptocurrency to buy a FIFA 18 for your kid, it’s no different to withdrawing cash from your bank account and using it to buy the game.

It’s when the cryptocurrency is being held as an investment, and is being traded with an intention to make a profit, or is being used by a business to pay for day to day transactions, that formal record keeping comes into play.

3. Are you an Investor or a Trader? This is important

Investor: If you’re considered to be an investor, disposals of cryptocurrencies for an individual are subject to Capital Gains Tax (CGT), not income tax. This means that for every disposal of a cryptocurrency, a CGT calculation will need to be completed and reported on a relevant tax return. You’ll need to keep track of purchase price and associated costs as well as disposal proceeds and any associated costs of sale to calculate a gain made per disposal.

You do have your Annual Exemption to offset against any gains made, which is currently £11,600, but with the rapid rise in cryptocurrencies over the past few years this may not cover all of the gains made and the excess will be charged at your appropriate rates for CGT.

Trader: If you are trading in cryptocurrency, the rules are ever so slightly different. You will still be taxed on the gains made, but your tax free personal allowance would be offset against this (assuming you haven’t offset this against other income) and then you would pay tax and National Insurance on the profits.

4. And what if you’re operating through a business?

If you are operating through a corporate structure such as an LLP or a limited company, any gains or losses made by the business when disposing of a cryptocurrency will be taxed as part of the profit and loss account (if the gains/losses are made during the course of the normal trade of the business. i.e. if you run a financial trader business).

If the cryptocurrency was held as an investment alongside a different trade carried out by the business, for example a firm of building contractors who invested their cash into Bitcoin, then the gains/losses made will be taxed as investment income and you won’t be able to offset any losses made against the profits from your other business.

5. Your crypto wallet is treated in the same way as a foreign currency bank account

Whichever way you are using the cryptocurrency, the crypto wallet in which you hold your cryptocurrency is treated in the same way as a foreign currency bank account would be for accounting purposes. The value of the crypto wallet will regularly be converted into the flat currency used by the country you’re operating in, and you may need to pay tax on any exchange gains or losses that arise as part of the conversion.

6. Remember, cryptocurrencies are still extremely volatile

Always keen in mind, that despite the huge gains and success stories you’re hearing and reading about, cryptocurrencies are still extremely unpredictable. Care and consideration should be taken before investing heavily!

Don’t jump straight in without an expert to help, let us know about your personal situation so that we can help you make safer investment choices. Find out:

  • Whether you’re a trader or investor, and what that means for tax
  • What records you need to keep
  • The best way to invest

Fill in your details below and we’ll get back to you

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Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

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