Your Bitcoins might have bought you quick riches but do you need to let HMRC know? Do you need to pay tax on the profits you’ve made by selling crypto assets? The short answer is, yes.
There is a misconception out there in the etherium, sorry ether…. that the profits made from the sale of crypto assets would be treated like gambling winnings, or tax free.
Unfortunately that’s not the case and crypto profits are taxed in the same way as other financial assets.
How does that work?
That means that you’re liable for capital gains tax if you’re an ‘investor’ in crypto currency, ‘investor’ being the key definition here. On the other hand if you’re ‘trading’ in crypto currency then you wouldn’t pay capital gains tax on the gains, you’d need to pay income tax.
Do I want to be an ‘investor’ or a ‘trader’?
Well, you probably want to be classified as an investor because you’ll be liable to pay capital gains tax, which is taxed at a lower rate than income tax for most people. You receive the first £12,300 of capital gains tax free as an allowance. The capital gains tax rate above that tax free allowance is 20%.
Income tax on the other hand increases to 40% once you’ve earned more than £50k; and your salary and most other income from employment and dividends falls into this category.
But it doesn’t matter what you want!
Unfortunately, you can’t choose to be an investor or a trader. The facts determine the treatment. The good news is that you’ll be seen to be an investor, and the gains will be capital gains (not income) unless your behaviour and intentions give rise that you’re ‘trading’ in crypto currency.
To be ‘trading’ HMRC would apply the ‘badges of trade’ tests to your circumstances. There are a number of conditions which suggest you could be carrying on a trade, including:
- Having a profit seeking motive when buying and selling
- Number of transactions
- Nature of the asset
- Interval time between purchase and sale.
Having a profit seeking motive means – did the owner originally intend to trade, or were the transactions for investment purposes only? HMRC place a huge emphasis on the intention when you purchase the asset, so it’s best to document this where possible.
An example or two:
Eddie Jones
Eddie Jones has been buying and selling Bitcoin since 2010, he’s always making purchases and sales, sometimes several times per month. For 10 years Eddie did this and during that time he made a total profit of £1m on his activity.
He also ran a blog called ‘How to trade crypto’. He also wrote a book – ‘Eddie Jones my story trading bitcoin’. He also ran a youtube channel, and did those really annoying ads that come up with Ferraris in the background. You get it…
Now, Eddie would like to treat the gains he’s made as capital gains instead of trading gains.
We advise Eddie he should most likely treat those gains as ‘trading’, and they should be taxed as income as opposed to capital, unfortunately resulting in a higher tax rate.
Steady Jones
Steady, like Eddie, purchased Bitcoin back in 2010; he purchased them when they were £0.50 a coin. He accidently left the laptop he used to buy them in his mother’s attic, and unlike this poor bloke from Wales, he didn’t accidentally throw them all away.
Steady, cleaning out his mothers attic in 2020, found his laptop, remembered the Bitcoin, and now he’s worth more than he could ever imagine.
Because Steady:
- Only made one transaction
- Didn’t have any intention documented that he was trading
- and, had an interval of 10 years between his original purchase and sale
We conclude that Steady is an ‘investor’ and his profits from Bitcoin will be taxed as a capital gain.
Conclusion
Crypto currency profits are taxed in a similar manner to other financial and property assets. The key question is whether someone has been ‘trading’ or ‘investing’ in crypto assets.
Once that is defined then the tax consequences are clear. However, unlike Eddie and Steady, the differentiation can be a complex thing and something we’d advise you get professional advice on.
James Watson
