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Alun Evans, a partner at Bevan Buckland LLP, says whether you share the same view as Warren Buffett that cryptocurrencies are “rat poison squared”, or whether Elon Musk is on your Twitter feed, the reality is that almost a fifth of British people say they have bought cryptocurrency in recent years. Since the launch of Bitcoin in 2009, cryptocurrencies have grown steadily in the public consciousness and this will likely continue.

If you’re an investor, or if you’re thinking of investing, bear in mind that your actions are very much on the taxman’s radar too.

Dabblers, heavy investors and businesses with a cryptocurrency interest should be mindful of all tax implications. These can apply to those owning cryptocurrencies like Bitcoin, Ethereum, Ripple and Litecoin.

Alun Evans, Partner at Bevan Buckland LLP, based in our Haverfordwest office, says: “We have had several queries from clients. Some have made seven-figure profits on crypto in the last year.  Most have suspected they have a tax issue but have not factored tax into the gains.  If you have invested in bitcoin and then cashed that in to invest in Ripple, there will be a gain on the bitcoin.  You cannot roll over a gain on one cryptocurrency to another. Also, when you receive tokens through staking, these are taxed as income.

“HMRC can make information requests from crypto-exchanges (where individuals and business can buy, sell and hold cryptoassets) and disclosure by UK based exchanges have already been made.

“HMRC has published separate guidance on what private investors and business investors should be aware of.  They also recognises that most individuals will hold cryptocurrency as a personal investment, hoping for capital appreciation. So, you need to think about capital gains tax. You may have to pay a tax on your gains too. Therefore you may be able to use losses to offset other taxable gains. Whilst speculative, HMRC does not consider it gambling, so there is no capital gains tax exemption to be had on that front.”

In the tax year ending April 2022, the capital gains tax rates relating to non-residential property assets are:

  • 10% of the taxable gain for basic-rate taxpayers
  • 20% for higher-rate taxpayers

Don’t forget, you have an annual exemption for your first £12,300 of capital gains in 2021/22. So, with cryptocurrency this could lead to a sale for real-world money, exchanging it for another crypto-asset, using it to buy something, or giving it away (unless you give it to a charity, in most cases). As with some other assets, further rules apply when you have multiple holdings of the same cryptocurrency which cannot be distinguished – this is known as pooling.

Good record-keeping is essential so you can account for your activities if you need to do so. It is not sufficient to rely on your cryptocurrency exchange for submitting your tax return. It is also wise to get some professional guidance on the use of cryptocurrency and how it can fit into your investment activities. There are also potential pitfalls from a tax point of view that investors should get advice upon – for example, since they aren’t a physical asset, there are questions about which jurisdiction applies the due taxes. Other circumstances which should be talked through with your financial advisor include:

  • Are you a trader or investor? Tax on trading can be substantially higher than capital gains.
  • Do you receive airdrops?
  • Do you receive employment income in cryptocurrency?
  • Have you encountered a blockchain fork?
  • Have you been defrauded or lost access to your cryptocurrency by losing your private key?

We can help you ensure you handle your cryptocurrency affairs as tax-efficiently as possible while remaining compliant.