In recent years, cryptocurrency has become an increasingly popular form of digital currency and investment.
While the concept of using virtual money is still relatively new to many people, it is important for individuals who own or trade in cryptocurrencies to understand how they are taxed in the UK. This article will provide a comprehensive overview of the current state of cryptocurrency taxation in the UK, covering key issues such as capital gains tax, income tax, and corporate tax. We’ll also discuss some recent changes to the law that may affect how you are taxed on your cryptocurrencies in the future.
Understanding Capital Gains Tax
Capital gains tax is a tax levied on the profit made from selling an asset, such as stocks or property. In the case of cryptocurrency, capital gains tax applies to any profits made from buying and selling virtual currency.
The amount of tax you owe depends on how long you held the cryptocurrency before selling it and the price at which you bought and sold it.
If you buy a cryptocurrency and sell it for a profit within the same tax year, you are liable to pay capital gains tax on the entire profit made from the transaction. For example, if you bought a cryptocurrency worth £10,000 in January and sold it for £20,000 in December, your profit would be £10,000 and you would owe capital gains tax on this amount.
If you buy a cryptocurrency and hold it for more than a year before selling it, you may be eligible for a lower rate of capital gains tax. This is because the government recognizes that holding assets for longer periods can reduce the risk of speculation and therefore reduces the likelihood of market fluctuations impacting your investment.
If you buy a cryptocurrency and hold it for more than a year before selling it, you will be taxed at the 10% basic rate of capital gains tax on any profit made from the transaction. If your income is over £50,275 per year, you will be taxed at the higher rate of 20%. If you are a higher or additional rate taxpayer, you may be eligible for a further reduction in the amount of tax you owe on your cryptocurrency profits.
Income Tax
In addition to capital gains tax, individuals who use cryptocurrencies as a form of income may also be liable to pay income tax in the UK. This includes any cryptocurrency that is used as payment for goods or services, as well as any income earned from trading or mining virtual currency.
If you receive payment in cryptocurrency for goods or services, this will count towards your personal allowance of £12,570 per year. Any amount you earn above this threshold will be subject to income tax at the standard rate of 20%.
If you are earning a significant income from cryptocurrency, you may want to consider registering as a self-employed individual or setting up a limited company. This can help you keep track of your income and expenses, as well as potentially reducing the amount of tax you owe on your earnings.
Corporate Tax
If you own or run a business that uses cryptocurrencies, you will need to be aware of the tax implications for your company. Like individuals, businesses that use cryptocurrencies as payment for goods or services are subject to income tax in the UK. However, businesses may also be liable to pay corporation tax on any profits made from trading or mining virtual currency.
If your business uses cryptocurrency to purchase goods or services, this will count towards your company’s annual allowance of £30,000 per year. Any amount you spend above this threshold will be subject to VAT, which is currently set at 20%.
In addition to VAT, businesses that use cryptocurrency may also need to pay corporation tax on any profits made from trading or mining virtual currency. The rate of corporation tax depends on the size and profitability of your business.
Recent Changes to the Law
The UK government has recently introduced changes to the way in which cryptocurrencies are taxed, which may affect how individuals and businesses are taxed on their virtual assets in the future.
From April 2019, individuals who receive payment in cryptocurrency for goods or services will no longer be exempt from income tax if they do not spend their earnings within a certain timeframe. Instead, they will need to declare their earnings and pay income tax on them.
In addition, from June 2020, businesses that use cryptocurrency as payment for goods or services will also need to comply with new tax rules. From this date, any business that accepts cryptocurrency payments will be required to register for VAT if their annual turnover exceeds the current threshold of £85,600 per year.
Case Studies
Example 1: John bought a bitcoin worth £5,000 in January and sold it for £10,000 in April. He held the bitcoin for three months before selling it, so he is liable to pay capital gains tax on his entire profit of £5,000. Since his income is over £50,275 per year, he will be taxed at the higher rate of 20%.
Example 2: Sarah received payment in bitcoin for her freelance writing services, which were worth £1,000 in total. Since she spent this amount within a few days of receiving it, she does not need to declare her earnings or pay income tax on them.
Example 3: Mark owns a small business that sells goods online using cryptocurrency as payment. His annual turnover is £60,000 and he accepts bitcoin payments from customers. Since his business is registered for VAT, he will need to charge VAT on any bitcoin transactions he makes, even if he does not hold any bitcoin himself.
Summary
In conclusion, it is important for individuals and businesses who own or use cryptocurrencies to understand how they are taxed in the UK. While the current system of taxation may be complex, recent changes to the law mean that it is more important than ever to stay informed about your tax obligations. If you are unsure about your responsibilities as a crypto user, it is always best to seek advice from a professional tax advisor or accountant.