Cryptocurrency has been making headlines in recent years, with its volatile nature and potential for high returns. As more and more people invest in this digital currency, it's important to understand how taxes work for those who have made gains from investing in cryptocurrency news.
The Basics of Cryptocurrency
Before delving into the tax implications, it's important to have a basic understanding of what cryptocurrency is. In simple terms, it is a digital or virtual currency that uses blockchain technology for secure transactions. Unlike traditional currencies, it is not backed by a central authority and operates independently. The most well-known cryptocurrency is Bitcoin, but there are now thousands of other cryptocurrencies in the market, such as Ethereum, Litecoin, and Ripple.These currencies can be bought and sold on cryptocurrency exchanges, and their value is determined by market demand.
Taxation of Cryptocurrency Gains
When it comes to taxes, the HM Revenue & Customs (HMRC) treats cryptocurrency as a form of property rather than currency. This means that any gains made from buying and selling cryptocurrency are subject to capital gains tax (CGT).Capital gains tax
is a tax on the profit made from selling an asset that has increased in value. For example, if you bought 1 Bitcoin for £10,000 and sold it for £20,000, you would have made a capital gain of £10,000. The amount of CGT you pay depends on your income tax bracket. If you are a basic rate taxpayer (earning up to £50,000), you will pay 10% CGT on your cryptocurrency gains.If you are a higher or additional rate taxpayer (earning over £50,000), you will pay 20% CGT. It's important to note that CGT is only applicable when you sell or dispose of your cryptocurrency. If you are holding onto your cryptocurrency and its value increases, you will not be taxed until you sell it.
Reporting Cryptocurrency Gains
As with any other form of income, it is your responsibility to report your cryptocurrency gains to HMRC. This can be done through a Self Assessment tax return, which must be submitted by 31 January following the end of the tax year in which the gains were made. If you have made significant gains from cryptocurrency investments, it may be worth seeking the advice of a tax professional to ensure that you are reporting and paying the correct amount of tax.Offsetting Cryptocurrency Losses
Just as you can make gains from investing in cryptocurrency, you can also make losses. The good news is that these losses can be used to offset any capital gains made in the same tax year. For example, if you made a capital gain of £10,000 from selling cryptocurrency but also made a loss of £5,000 from another investment, your taxable gain would be reduced to £5,000. If your losses exceed your gains in a tax year, you can carry them forward to offset against future gains.However, it's important to note that losses can only be used to offset capital gains and not any other form of income.
Other Tax Implications
In addition to CGT, there may be other tax implications for those investing in cryptocurrency. For example, if you receive cryptocurrency as payment for goods or services, it will be treated as income and subject to income tax. Similarly, if you are mining cryptocurrency as a business, any profits made will be subject to income tax. You may also need to pay Value Added Tax (VAT) on any goods or services purchased using cryptocurrency.Staying Compliant with HMRC
As with any form of income, it's important to stay compliant with HMRC when it comes to cryptocurrency gains. Failure to report and pay the correct amount of tax can result in penalties and interest charges. It's also worth noting that HMRC has been cracking down on cryptocurrency investors who have not declared their gains.In 2019, they sent letters to thousands of individuals suspected of not paying the correct amount of tax on their cryptocurrency investments.
