Cryptotax Decrypted

Sam Stent, tax advisory manager highlights a tax issue which may affect investors and traders in cryptocurrency.

Seemingly unaffected by the pandemic, the value of the Bitcoin has experienced a meteoric rise since March 2020 and November 2021 has seen the value of a single bitcoin reach record levels in excess of $65,000. Since Bitcoin was introduced in 2009, a number of other cryptocurrencies have also emerged such as Ethereum, Litecoin, Cardano and Stellar.

However, HMRC now has access to cryptoasset data and in the coming weeks it plans to send out ‘nudge letters’ to investors to encourage them to report any crypto income or gains.

Samantha Stent, Tax Advisory Manager says,

“This campaign may have been prompted by the fact that HMRC believes they are owed large amounts of tax from income and gains on cryptocurrency investments. Our view at Scrutton Bland is that most underpayments of tax in relation to Bitcoin will not be deliberate, but it is very important that if you do receive a ‘nudge letter’ that you don’t ignore it.

Bitcoin is not just the preserve of wealthy investors.  For example, we are aware of individuals who have inherited bitcoin holdings who then need to sell some of the cryptocurrency in order to meet inheritance tax liabilities.  In addition, market volatility has spooked many people into selling their cryptoassets.  However, when it comes to the tax implications, these individuals are often unaware that there is a reporting requirement.”

In the vast majority of cases, individuals hold cryptoassets as a personal investment hoping for capital appreciation. In such cases, they will be liable to pay Capital Gains Tax when they make a disposal.  The rules for calculating the gains are similar to the rules for shares, with different cryptocurrencies held in separate ‘pools’ with special ‘matching’ rules that tell you how to allocate costs if you only sell some of your cryptocurrency.

However, if you regularly mine or buy and sell Bitcoin and similar products, you may be treated as trading in cryptoassets and therefore subject to (much higher) income tax on any profits.

Some employees are paid in cryptoassets.  Where the currency can be publicly traded (such as with Bitcoin), it will be treated as a ‘readily convertible asset’.  This means that the employer must deduct and account to HMRC for PAYE and NICs in the same way as for any other salary payment. Otherwise, the individual employee must declare the ‘earnings’ and pay income tax via Self-assessment (but the employer will still need to pay Class 1A NICs to HMRC).

Stamp Duty considerations should also be borne in mind when it comes to using cryptocurrency to pay for shares or to purchase land or property.  As the tokens amount to “money’s worth”, the transactions can fall within the SDRT and SDLT charging provisions.

HMRC recognises that cryptocurrencies and the technologies behind them will continue to evolve and that consequently, so will the tax rules.  Accordingly, at Scrutton Bland we are adopting an agile approach when it comes to advice in this area.

If you need advice in relation to cryptocurrencies, Sam Stent or one of the tax advisory team would be happy to discuss your situation with you.