The use of cryptocurrencies is becoming increasingly popular, despite the volatility in the market.

In fact, as many as one in ten people have engaged in the crypto market.

But, if you do trade with cryptoassets and make a gain, you need to make sure you fulfil your tax responsibilities.

With the increase in people making gains from trading, HM Revenue & Customs (HMRC) is using its data-gathering powers to identify any potential tax avoidance offenders.

How are cryptoassets taxed?

Tax liabilities depend upon the way the profit was gained and the circumstances of the business or individual which means that buying or selling using cryptocurrency – or acquiring cryptocurrency as an investment – could result in a liability to Income Tax, Capital Gains Tax (CGT), or Inheritance Tax (IHT).

How can you remain compliant?

If you have achieved cryptoasset gains that are liable to CGT, you will need to report this on a tax return and pay the arising tax by 31 January following the end of the tax year in which they arise.

If you do not usually complete tax returns it is necessary to register with HMRC within six months of the end of the tax year.

When calculating CGT payable on cryptoassets, the standard CGT tax exemption is available, entitling every taxpayer to annual gains of £12,300 before any tax is payable. Anything above that figure is subject to taxation.

Gifting cryptoassets

Just like other assets, cryptoassets can be given away as part of a lifetime gifting strategy.

They are considered to be property for the purposes of IHT and will form part of an individual’s estate. However, because of the volatile nature of the market, any gifting should be done with caution after taking expert advice. Gifts between spouses are always tax-free, as with other types of assets.

Income Tax 

If HMRC decides that you are trading, rather than just investing, it may tax your profits as income instead of gains. This typically occurs where an individual is:

• Actively mining cryptocurrency
• Is considered a dealer due to the volume of trade they complete
• Validating transactions
• Staking and yield farming.

In the case that an employer pays their employees in cryptoassets, they will be taxable as employment benefits.

Need tax advice on cryptocurrencies? Get in touch.