The following cryptocurrency help is intended for UK individuals. If you have a UK Ltd Company, please refer to our tax help for Companies.
Cryptocurrency Self-Employed | Tax Returns for Individuals
In this article we will discuss self-assessment tax returns and declaring cryptocurrency transactions including:
- Do you need to complete a cryptocurrency tax return?
- Are you classed as an investor in cryptocurrency, or a cryptocurrency trader?
Self Assessment help for:
- Those who accept Crypto as a means of payment
- ICO's, Airdrops, Bounties
- How to fill in the Tax Return, and which sections to use.
What is a Cryptocurrency Self Assessment?
In the UK, each year we are required to declare our annual income to the tax authorities (HMRC) and we must pay tax on what we earn.
For a large amount of people, income is declared by the employers via monthly payroll and the tax is paid directly to HMRC on your behalf.
As such, if you have only ever received your salary via payroll, then you may have never needed to undertake the process of filing your own tax return and this process may be entirely new to you.
Cryptocurrency activities form part of your overall Self Assessment.
For a lot of people making transactions in cryptocurrency will trigger the need to complete a self-assessment. When people talk of ‘cryptocurrency self-assessments’ (or ‘crypto tax returns’), what they mean is the inclusion of crypto activities on the ‘normal’ self-assessment process.
Do I need to report my Cryptocurrency to HMRC?
In certain cases, you do not need to report your cryptocurrency activities to HMRC!
Buying cryptocurrency is not a taxable event in the UK. You do not need to tell HMRC when you purchase crypto.
For example let’s say you bought 1 BTC in May 2017 and did nothing with it – the Bitcoin simply sat in your digital wallet – in this instance you would have no tax liability, as long as it just sits there. True-hodler’s are one example of people who would not need to declare their crypto activities.
But as you start to sell Crypto, then you create taxable events.
Do I need to complete a Tax Return if my income is only partly from Cryptocurrency?
This applies a lot of our clients and the answer is yes!
You are obliged to declare all your sources of income on your tax return. For example, PAYE income; rental proceeds from letting houses; dividends; sale of certain assets.
Well, failing to declare any part of your income – cryptocurrency or fiat – will change the % rate at which you are taxed – you could potentially pay too little tax.
HMRC have a wide range of powers to seek information from third parties to establish your total income and if you do not declare something, the tax man may come looking...
Reporting your cryptocurrency activity is completed on the same form as fiat income. The first issue to tackle is how to categorise your cryptocurrency tax activity – this can cause a tax headache….
Self Employed Crypto Tax can be broken down into 3 main categories:
CATEGORY A Those who invest or trade in cryptocurrency. If you are an investor you need to declare any gains made in cryptocurrency as capital gains – which is taxed at 10% or 20% dependent on your total annual income If you are a trader, you need to declare any money made in cryptocurrency as trading income – which is generally taxed at 20% to 45% dependent on your total annual income. Plus, as a trader, you may have a National Insurance liability too of approximately 9%.
CATEGORY B Those who have accepted cryptocurrency as payment. If you have received income in the form of cryptocurrency instead of, or as well as, fiat for services. This is generally taxed between 20% and 45% dependent on total annual income, plus National Insurance.
CATEGORY C Those who received tokens or other newly emerging payment options. ICO tokens, airdrops and bounties – more on this category later.
1. AM I A TRADER OR INVESTOR?
Crypto Trading vs Investing
Why the big deal?
As we saw in the above definition, in the UK cryptocurrency ‘trading’ attracts income tax, whereas cryptocurrency ‘investment’ attracts capital gains tax.
Crucially, the tax on investment (i.e. capital gains tax) can be around 50% less than the tax on trading income (i.e. income tax). It’s fairly obvious which category most people would like to fall into…
Many people, some following outdated online advice, simply believe that by engaging in crypto activities of any kind they are simply ‘investing’ in cryptocurrency and storing it much like a bitcoin bank account.
In the eyes of HMRC, for you this may not be the case!
Trading Losses vs Capital (Investment) Losses
The same can be said of losses.
You need to establish whether it was a trading loss (income), or a loss on an investment (capital). You may be eligible for tax relief on both - however a loss on investment affords you less tax relief than a trading loss.
Do not assume you are an ‘investor’ because it suits you!
I’m not sure if I am an Investor or Trader?
Even though tax legislation is at a somewhat infant stage, there is some guidance.
Crypto Badges of Trade
Everyone’s circumstances are different - one size doesn’t fit all. HMRC has published badges of trade to help you evaluate whether you are trading cryptocurrency, or simply investing.
The checks start with questions such as – Is this your main employment? How frequent are your transactions? What is your background and experience? Plus many more.
Your main income may be a 9-5 job, but you might find after running through the questions that your evening dabbling in the cryptocurrency markets still classes you as a trader.
What if I get it wrong?
Unfortunately, if HMRC deem you to have been trading rather than investing, they have the power to collect the unpaid additional tax from you, and possibly apply penalties and interest.
HMRC Cryptocurrency Tax Advice UK
Nothing is better than asking a professional’s opinion.
The team behind Harvex have been providing individuals in the UK with cryptocurrency tax advice since 2014, having direct conversation with the tax authorities.
Harvex will be able to advise whether you will be viewed by HMRC as a trader or investor, and complete your full tax return!
2. SELF ASSESSMENT FOR CRYPTO INVESTOR
As a cryptocurrency investor – when you sell your cryptocurrency, ie when you convert it to fiat (GBP), it triggers the taxable event.
Sure, you may have gained or lost on the investment, but irrespective of that, the sale is a taxable event and you should assess how to handle this tax position.
I sold at a profit!
Crypto capital gains tax relief
First the good news – as we saw above, HMRC will give you some of your gains tax free!
- Tax year 6th April 2017 to 5th April 2018 = £11,300 tax free
- Tax year 6th April 2018 to 5th April 2019 = £11,700 tax free
The amount of tax you pay on income over this figure this will be 10% or 20%, depending on your total annual income (this is why you must declare all sources of income).
I sold at a loss
Capital losses are available to cryptocurrency investors. This means losses can be offset and your tax bill could be reduced.
Bed and breakfasting
There are a couple of other options we can look at, such as bed and breakfasting. This relates to the times at which you bought and sold cryptocurrency around the end of the tax year. These rules apply to cryptocurrency.
3. SELF ASSESSMENT FOR CRYPTO TRADER
Tax on Trading Cryptocurrency
If you are classified in the eyes of HMRC as a trader, the financial gains you make via trading cryptocurrency will be subject to income tax, which is payable on everything you earn above your tax-free allowance (see below).
Trading tax is at a rate of 20% - 45% of your total annual earnings, depending on how much you earn in the whole tax year.
I traded at a profit!
Trading tax free allowance
The good news again - HMRC will give you a proportion of your profits tax free!
- Tax year 6th April 2017 to 5th April 2018 = £11,500 tax free
- Tax year 6th April 2018 to 5th April 2019 = £11,850 tax free
The amount of tax you pay will be subject to pay on income above this amount will be 20% to 45%, depending on your total income in the tax year (this is why you must declare all your income!).
As a trader, different to an investor, you will be required to pay National Insurance contributions on profits at 9% on income above £8.5k.
Margin Trading Profit
If you’re involved in margin trading, then include this as income, too.
I traded at a loss
At Harvex we are experienced and can guide you in your approach in this situation. Firstly, you need to combine all your trades together (makes sure you use the appropriate exchange rates at times of trade to calculate this) – over the course of the financial year. Remember crypto-currency is its own asset class so losses in BTC may be off-set against gains in ETH, etc., so to declare that you made a loss, this means that all your gains and losses in Bitcoin, Ethereum, Litecoin over the course of the financial year combine together to be in total deficit.
Sideways loss relief
If the circumstances are right (and Harvex can advise you on this), there are certain circumstances whereby if you made a trading loss, you may be able to claim sideways loss relief against other income.
How can I tell the taxable balances from the exchange reports?
Here are Harvex we’ve worked with almost every major exchange and can efficient assess your gains and losses.
4. SELF ASSESSMENT FOR ACCEPTING CRYPTOCURRENCY AS PAYMENT
You can be taxed on Bitcoin as a means of payment for services in two ways:
- If you are paid in bitcoin as a substitute of your salary (i.e. it is processed through the payroll system).
In this instance, you should ensure that your employer is processing the payroll in exactly the same way as they would if they were paying in fiat; meaning that your employer is deducting your PAYE income tax and your National Insurance contributions at source and paying them over to HMRC on your behalf. If this is happening correctly, you do not need to declare your Bitcoin income – as it has already been done for you via payroll.
2. You are paid bitcoin as a means of payment i.e. you invoice for your services.
If you invoice for your services, this needs to be declared on your self-assessment in the same way as if you were invoicing in fiat.
I received a payment in BTC, but I didn’t convert it to GBP?
This is a slightly more complex scenario. In this situation there is potential for you to move from accepting BTC as a payment, to becoming a BTC investor, and you may want to consider the tax impact for that. Speak to Harvex about this – we can advise you.
I am VAT registered – should I charge VAT on my cryptocurrency invoice?
VAT treatment stays the same if you are paid in cryptocurrency or fiat. You should proceed under the exact same VAT rules as if you were being paid in GBP.
5. SELF ASSESSMENT FOR ICO TOKENS, AIRDROPS & BOUNTIES
The crypto world has spawned unique tax complexities that don’t exist with fiat.
However, that does not mean you should not seek out reliable industry specific advice – many would argue that in this rapidly moving market it is imperative to do just that.
Payment in Tokens
In the scenario above, if you are paid in cryptocurrency, you are taxed on the GBP value (at a certain point of time) of the invoice. The fact payment was made in BTC doesn’t negate the tax charge. However in that scenario there is an active market for BTC with corresponding GBP values, and you are receiving a coin of value in exchange.
What can be confusing about being paid in pre-listed coins or tokens, is that these can be considered to have zero value, with no active market.
If you prepare your self-assessment on a ‘cash basis’ (as opposed to an accruals basis), then you may not need to include ICO tokens (pre-listing), as the cash equivalent at the time of declaration is £0.
However - it is important to note that in this constantly evolving market, this situation should be appraised again in detail before filing the tax return.
Airdrops | Bounties
Generally speaking, an airdrop token has no value, or minimal value and has been airdropped for publicity and marketing purposes or in an attempt to increase liquidity. It is unlikely the airdrop or bounty will be a taxable event at the time.
6. CRYPTO SELF ASSESSMENT FAQ'S
I’ve never completed a tax return for Crypto – can I ignore it?
We know when people were first buying and selling cryptocurrency, a lot of people didn’t even know it existed. Maybe you didn’t realise you needed to complete a return? Or, maybe you thought it was all tax free as gambling? (It isn’t).
Regardless of when you started buying and selling in this market, you can’t ignore the tax on cryptocurrency.
Can I start next year?
Again, if you’ve found yourself needing to complete a tax return, deferring cryptocurrency income to next year is not going to be acceptable to the tax authorities. You need to file the appropriate returns with HMRC!
I found an article online, where it said all cryptocurrency is capital gains?
Firstly, you’re probably reading a USA article, because if the article is about UK tax, its wrong!
The standards in the UK are very clear, there is not one tax rate for all, even though it may make life easier.
How long do I have to complete the return? When do I pay the tax?
The tax year for declaring cryptocurrency activity is exactly the same as for fiat.
The deadline for the tax year ending on 5th April, is 31st January the following year.
From April to January might sound like enough time to prepare your tax return, but the time it may take to collate your gains and losses, it is advisable to complete it as soon as possible.
You will then have dates by which you need to pay tax to HMRC; 31st January and, in some cases also on 31st July. The July payment is if you need to make a payment on account for the following year.
How much is the payment on account?
If you are required to make a payment on account with HMRC, it would be 50% of your tax bill in January and 50% in July as a forecast of the tax you will pay for the following tax year.
Not all income sources require you to make a payment on account, though.
7. FILING IN A CRYPTO SELF ASSESSMENT
Which sections of the self-assessment do I use for Cryptocurrency?
We have looked at the different categories above, so to come full circle – lets get them into the correct section of the tax return.
With a few exceptions, there are 2 main sections you will need to use for your cryptocurrency related activities:
- Self Employed Section (on the assumption you are working (trading) for yourself)
- This will trigger income tax
- Use this for trading and receiving crypto as payment
- Capital Gains Section
- This will trigger capital gains tax
- Use this section when you sell your crypto investments
What else do I need to know?
Remember the key points;
- Cryptocurrency earnings of any type are classified as income and should be included as part of your ‘normal’ self-assessment tax return, potentially with some additional pages.
- Make sure you are clear whether your cryptocurrency activities are subject to income tax (trading, services paid in crypto) or to capital gains tax (investments)
- Include all income - crypto and non-crypto - to ensure you pay the correct tax.
If you have questions or need help