If you have sold, gifted or spent cryptocurrency in the tax year ending 5 April 2017, you may need to declare any profit or gains on your self-assessment tax return due 31 January 2018.
We are currently advising several clients on the tax treatment of their cryptocurrency investments and trading activity and it is clear that there is widespread uncertainty about the correct position. If you fail to declare taxable income or gains, you may be liable to interest and penalties.
How much tax will I need to pay on cryptocurrency profit?
Profits made on cryptocurrencies by individuals will generally be subject to capital gains tax (CGT) at a rate of up to 20% after deducting the annual CGT allowance (£11,100 for the 2016/17 tax year). Where you have bought and sold cryptocurrencies through a UK company, any taxable profits will be subject to corporation tax at a rate of 19%. If you have regularly bought and sold cryptocurrencies HMRC may seek to argue that you are liable to income tax at a rate of up to 45%. Most exchanges will keep a record of your transactions and let you download your history.
If you are uncertain as to whether CGT or income tax will apply to your transactions, please contact Helen Cox or your usual Mishcon de Reya tax contact.
Will I be liable to tax if I gift my cryptocurrency or use it to buy another asset?
Under existing CGT rules, if you gift your cryptocurrency or use it to buy other capital assets (including exchanging one cryptocurrency for another), you will be liable to tax on any increase in the value of your cryptocurrency between the date you acquired it and the date of the gift or purchase (subject to any available reliefs or allowances). If you are subject to corporation tax or income tax on your profits, similar rules apply.
How will HMRC know about my profits?
HMRC now has significant powers to acquire and analyse information concerning UK taxpayers from a range of UK and non-UK sources. If HMRC raises an enquiry into your tax returns, it is likely to question the appearance of profits in your bank account that have not been accounted for. The UK and EU are also currently consulting on new regulations which may require trading platforms to report information on certain account holders to the relevant national authorities.
What if I have made a loss?
Many cryptocurrencies increased in value during the 2016/17 tax year. However, if you made a loss on individual transactions, you may be able to offset these losses against your cryptocurrency profits or other capital/trading profits. If you have bought and sold cryptocurrencies through a UK company and the company has made a loss on any individual transactions, loss relief may be available under the corporation tax loss relief rules. As mentioned above, many of the exchanges will keep a record of your transactions and let you download your history. It is essential to keep these records on file so that you can claim relief for any losses that you make.
What if I fail to declare any taxable profits?
If you deliberately fail to declare taxable income or gains, HMRC has up to 20 years following the end of the relevant tax year to enquire into your tax returns. If tax has been underpaid, you may be liable to interest and penalties of up to 100% of the amount of tax due. In the most serious circumstances, criminal liability may apply.
There is still time to seek advice and make the necessary disclosures on your 2016/17 tax return.
Please contact Helen Cox or your usual Mishcon de Reya tax contact if you have any queries or concerns.