The taxation of crypto-currencies varies widely across the world, with different countries taking vastly differing stances on how they are viewed and handled. The UK has taken a very favorable position, adding certainty to individuals who have invested in crypto-currencies which many other countries have not yet provided or decided upon. 

Income Tax – Individuals trading in crypto-currency need to pay tax on any gains made from their investments. However, the UK Government has taken a very pro-crypto stance by making it very clear that capital gains tax will not apply if an individual holds onto their crypto-currency for more than 12 months before selling it. This is also true even if you exchange one crypto-currency for another during this period – HMRC deem this as part of your investment portfolio rather than a trade. 

VAT – Again, the UK Government recognises crypto-currencies as a legitimate form of currency and so VAT will have to be charged when providing goods or services in exchange for crypto-currency. This is much the same as fiat currencies when exchanging goods and services. 

Corporation Tax – The value-added tax status also extends to companies who hold crypto-currency investments, even if they trade with them regularly, making it a very sensible choice from a taxation perspective. As seen in other countries, this approach makes it easy for businesses to operate within the law without having too great an impact on their bottom line. Corporations will need to consider how best to account for any trades made using crypto-currency though, including dealing with foreign exchanges where applicable. 

In short, the UK has taken a very positive and sensible approach to taxation of crypto-currency, which should provide certainty for those who have invested in this form of digital asset. This is in stark contrast to some other countries who are still trying to decide on an appropriate stance, leaving investors uncertain and at risk of prosecution. 

Crypto capital gains 

Crypto capital gains are just like any other capital gains. If you sell a crypto for more than you bought it for, you have to pay tax on the difference. If you’ve held the crypto for more than 12 months, the tax is reduced from 28% to 20%.  

If you’re exchanging one crypto for another, this is still classed as a capital gain. You have to pay tax on the difference between the two cryptos, regardless of how long you’ve held them for.  

Calculating cost basis:   

  In order to avoid overpaying tax, the recommended approach is to calculate your cost basis in a crypto before you sell it. Your cost basis is how much money you’ve put into acquiring a crypto. You can find this information on the crypto-currency’s block chain ledger under a transaction called a “coin base”.  

Calculating capital gain  

Your capital gain is calculated by subtracting your cost basis from the price you sold the coin for. This difference between these two numbers is what you have made from selling or exchanging that coin.  

For example if you bought 0.5 Bitcoin at £1,000 and then exchanged it for 0.55 Bitcoin when prices hit £2, – your capital gains would be £1,000 (0.55-0.5)*£2,000 = £1,000.  

If you’re holding a crypto for more than 12 months before selling it, the tax on that gain is reduced from 28% to 20%. So in the example above, your capital gains tax would be £200 (0.55-0.5)*£1,000 = £200.  

*This example uses simplified numbers for illustration purposes only. Your capital gains may differ depending on the exact dates and prices involved.  

Selling a property:  

When you sell a property, you have to pay Capital Gains Tax on any profit you make from it. This tax is charged at a rate of 18% or 28%.  

If you’re selling a property that you’ve owned for more than 12 months, the tax is reduced to 10% or 20%.  

So if you sell a property for £100,000 that you’ve owned for more than 12 months, your Capital Gains Tax would be £10,000 (10% of £100,000).  

Crypto-currencies may one day be accepted as legal tender in the UK – meaning that the government would officially recognise them as a form of currency and they would be exempt from VAT. However, this has not yet been confirmed and so crypto investors should continue to treat crypto-currencies as investments until such time as this changes. In other countries, such as the United States, crypto-currencies have not been given legal tender status and so are subject to capital gains tax when sold. 

The approach the UK has taken to the taxation of crypto-currencies is a very positive sign for investors. The government has shown that it recognises cryptoassets as an investment and has implemented a sensible system that allows businesses to operate within the law while minimising the impact on their bottom line. This stands in stark contrast to some other countries who are still trying to decide on an appropriate stance, leaving investors uncertain and at risk of prosecution. 

Under the UK’s new tax rules, crypto traders will only pay capital gains tax when they sell their crypto-currency holdings.  

Matching Rules:  

If you’re exchanging one crypto for another, this is still classed as a capital gain. You have to pay tax on the difference between the two cryptos, regardless of how long you’ve held them for.  

Your cost basis is how much money you’ve put into acquiring a crypto and can be found on the crypto-currency’s blockchain ledger under a transaction called a “coinbase”.  

The capital gain is calculated by subtracting your cost basis from the price you sold the coin for. This difference between these two numbers is what you have made from selling or exchanging that coin.  

For example, if you bought 0.5 Bitcoin at £1,000 and then exchanged it for 0.55 Bitcoin when prices hit £2,000 – your capital gains would be £1,000 (0.55-0.5)*£2,000 = £1,000. The other 0.05 Bitcoin represents your profit from the transaction and is subject to capital gains tax.  

If you’re holding a crypto for more than 12 months before selling it, the tax on that gain is reduced from 28% to 20%. So in the example above, your capital gains tax would be £200 (0.55-0.5)*£1,000 = £200.” 

Need further help? 

If you are unsure how this process works, or if you have any concerns about what your company’s future is likely to be, don’t hesitate to get in touch with the team today on +44 (0) 20 7060 5015 or email us @info@mayfairwealthadvisors.co.uk