Made money in cryptocurrencies? Don’t forget to pay your taxes – in sterling
Speculating on cryptocurrencies is akin to gambling in all but one respect, says Merryn Somerset Webb: you must pay tax on any gains, and you must pay it in sterling.
Is investing in cryptocurrencies the same as gambling? The obvious answer to that it yes, yes it definitely is.
How can we tell? Because it is entirely speculative: there is no history to compare today’s prices to; there is no baseline; there is no valuation metric to base your ideas of what the price should or shouldn’t be on; the prices are extremely volatile; and, of course, when you buy you risk losing everything.
Sounds like a bit of a gamble doesn’t it? So much so that if you win big or small you might think you will owe no tax. After all there is no tax due on gambling winnings in the UK (it was abolished in 2012 when Gordon Brown was concerned about competition from tax-free offshore betting). The gambling industry takes the tax hit in the form of various special levies instead.
But there’s a problem. You might think you are gambling when you visit your Coinbase account (as do I); the government does not. There is no special levy on the cryptocurrency industry (it’s too hard – which is rather the point). So you have to pay tax.
HMRC wants “its share of the proceeds”, says Rebecca Aldridge of Balance Wealth Planning in the FT this week, something you might as well know this month rather than next (the self-assessment deadline is approaching and Aldridge reckons up to a third of her clients hold cryptocurrencies).
If you are working and being paid in crypto you have to pay income tax on it – in sterling on the equivalent sterling value on the day you are paid. That means that if you are not working PAYE (if you are your employer takes the admin hit) and if you want to be safe you need to change the appropriate amount of cryptocurrency into sterling on that day, too – you won’t be amused if, on 31 January of any one year bitcoin that was worth £40,000 on your last payday is only worth £20,000 on your tax payment day and you haven’t the sterling to pay your bill.
You also have to pay tax on your crypto if you sell it or swap it for anything – note that spending it is effectively swapping it for goods. Doing either of those things crystallises its value and instantly makes you liable for capital gains tax on any rise in price since you bought it.
It gets worse. If you mainly mine your own bitcoin you will find that you are charged income tax on it (at the point of sterling value on mining) and, in some exceptional cases when individuals “buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself”, trading profits could be considered income and taxed as such.
And that’s not the end of it. You might end up paying income tax and capital gains tax on your bitcoin. If you are paid in it and its value then rises, the rise in value will be considered a taxable gain.
Obviously, you can mitigate capital-gains tax liabilities in some ways – losses can offset gains, for example, and you can use your capital-gains tax allowance to sell your gains over time (should you manage to hang on to those gains…) tax free (everything gets the capital-gains tax allowance).
But nonetheless, even for crypto cynics such as me*, there is something mildly disappointing about knowing that the likes of bitcoin are, on the one hand new (ish), exciting and capable (maybe) of changing the way money works, and on the other subject to the same dreary tax rules as everything else. To say nothing of the same harsh penalties for those who don’t engage with their tax bill – payable, I’m afraid, in sterling.
*As John and I have often discussed on the Moneyweek podcast, we aren’t yet convinced by the crypto case, but I still hold small amounts of several as a hedge against being completely wrong.