The ambiguity around cryptocurrency’s legal status and the lack of clear guidance on how to treat capital gains earned from cryptos may expose investors to a slew of potential lawsuits.
Despite this, cryptocurrencies are flying off the shelves, with several start-ups creating crypto exchanges to provide investors with simple access to this asset class.
On the other hand, the government and regulators are sceptical of private virtual currencies, despite the hype around digital currency.
This blog post will bring you through the most typical issues regarding cryptocurrency accounting UK.
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What are the tax implications of cryptocurrency gains?
The first step in assessing the tax treatment is determining whether the individual is trading or investing. According to HMRC, most people will hold crypto assets as personal investments and be subject to capital gains tax when they sell them.
It’s not always simple to figure out how much money you’ve made. Certain listings of crypto assets on a stock exchange do not use the pound sterling, and it is also usual in the crypto industry to swap one crypto asset for another directly.
When you factor in the daily volatility of the crypto market, determining the value of your crypto assets might be difficult. It’s important to understand that different forms of crypto assets are treated differently by HMRC for capital gains purposes.
Even if no actual currency is received, trading your Bitcoin will result in a capital gains tax disposal.
In this situation, the individual investor can either realise a taxable gain or loss or sell other crypto assets to pay the tax bill.
When is crypto taxed as income?
Individual investors are obliged to pay income tax and National Insurance Contributions (NICs) in the following categories, as HMRC has defined when crypto is considered income.
Getting paid in Bitcoin or other cryptocurrencies
Any cryptocurrency received as a kind of compensation is considered money’s worth. When anything has a direct monetary value for the employee or is transferable into cash, it is money’s worth.
You must pay income tax and NICs depending on the value of the cryptocurrency when you get all or part of your salary/freelance income in cryptocurrency.
The rules change based on whether or not the crypto asset you receive is convertible into cash, also known as a Readily Convertible Asset (RCA).
Mining
Mining cryptocurrency can be a full-fledged enterprise or a recreational activity. Several things influence how it is classified:
| Organisation | Risk |
| Activation level | Commerciality |
Mining as a business
Like a sole trader, when you classify a mining operation as a business, you will add the mining income to your trading profits and deduct any business expenses, like electricity costs, rent, etc. You can claim capital allowances on the depreciation of assets, like graphic cards or mining kits. The resulting profits will be subject to income tax and NI.
Mining as a recreation
When mining cryptocurrencies as a hobby, any resultant income is treated as miscellaneous income for income tax purposes.
When you do not sell the currency straight away, your income will be the fair market value of the cryptocurrency you received.
You can deduct reasonable expenses before arriving at the taxable income.
Capital gains tax will apply when you sell this cryptocurrency.
Staking
Like mining as a hobby, the GBP worth of any tokens received will be taxable as income (miscellaneous income), with any reasonable expenses decreasing the chargeable amount.
You might consider treating this as savings income and claiming your personal savings allowance to decrease further any taxes owed. We recommend consulting with a tax accountant if you’re thinking about doing this.
Please remember that capital gains tax regulations may apply if you sell it later.
Airdrops
The airdropped cryptocurrency will be exempt from income tax under the following conditions:
- They aren’t acknowledged as part of any crypto-related commerce or enterprise.
- They are given without expecting anything in return.
If you deliver airdrops in exchange for a service, they will be taxed and classified as either trading gains (if you are a firm) or miscellaneous income in the case of an individual.
Like cryptocurrencies, airdrops are also subject to capital gains tax at the time of disposal.
Tax breaks for crypto traders or crypto holders
Are any crypto transactions exempt from tax in the UK?
Yes, the following tax breaks are available to crypto traders and investors:
- Personal allowance- £12,570 for the tax year 2024/25
- Capital gains allowance- £3,000
- Misc trade or property income, if it is up to £1,000
- No stamp duty on purchase or sales
- No tax on the transfer to your spouse
- No tax on transfers between your wallets
- Holding cryptocurrencies
Challenges in cryptocurrency for accountants
Choosing a cost basis
Cryptocurrency exchanges, rather than stocks, allow users to purchase and sell digital currencies. Exchanges have different tax reporting limits.
Due to this reporting difficulty, tax professionals will find it incredibly difficult to track cost bases across several cryptocurrency platforms. If your customer hasn’t kept precise records, crypto tax software can help by automatically pulling historical cost basis and fair market value for all trades and transactions.
HMRC has laid down clear guidelines to make things clear for investors and accountants. There are three costs basis available: Same-Day Rule, Bed and Breakfast Rule and Section 104 Rule.
Access to transaction data is lost
It’s not uncommon for users to lose all of their transaction data required for tax purposes. Exchanges such as Mt. Gox and Cryptopia have shut down in the past owing to liquidity issues, leaving customers with no previous transaction data.
Users may also lose access to their accounts.
If a customer loses access to their exchange or wallet account(s) and does not have a record of prior transactions, the tax professional has limited options.
Working with the customer to fit all pieces together as correctly as possible is ideal, followed by posting a manual adjusting entry to zero out the ending balances for each “lost” account.
First, you should reconcile all account names where the client still has access to the ending balances.
Challenge for investors
Investors must progressively grasp their tax duties and be mindful that HMRC monitoring is never far away as if the task of planning investments in an ever-volatile market wasn’t enough.
HMRC’s nudge letters should serve as a reminder to investors, and anyone burying their head in the sand should think about what and how they need to report before HMRC intervenes. It is preferable to voluntarily notify HMRC of any difficulties than waiting to hear from them, especially given the potential fines.
Given that HMRC can look into someone’s affairs for a minimum of four years and up to twenty years in circumstances where they have purposefully avoided disclosure, those who do not register their crypto holdings may look over their shoulders for a long time.
Difficulties with cryptocurrency tax software
Not all tax software is created equally, and some difficulties appear in all of them. One of the most significant issues is the enormous number of exchanges and other venues for crypto users to trade or exchange tokens.
There are many such platforms available now. If your tax software does not directly support one, entering historical data into the program can be time-consuming and involve a lot of spreadsheet effort.
It can eat up a tax preparer’s time by manipulating data and getting it into the correct format. Many platforms also impose limitations on the amount of data you can import. The program can get costly if a client has thousands or tens of thousands of trades.
Final thoughts
The cryptocurrency business is expanding at a breakneck speed. Accountants that serve the space have a fantastic potential to grow their businesses due to this expansion. Cryptocurrency Taxes in the UK are relatively simple. Recognising the need to make returns and maintain records are fundamental problems, particularly for cryptocurrency transactions.
