Cryptocurrencies are becoming more and more seen within society. Put simply, cryptocurrencies are money but in digital form. Their value is determined by the network effect which is the same as physical money. The determined value is then secured by various algorithms.
Some people have made their fortune with crypto, but then the issue of taxes comes into play. Let’s take a look at how taxes relate to cryptocurrencies.
Do you have to pay crypto tax?
HMRC are responsible for UK taxation and in law, crypto is taxable for most people. Receiving crypto is seen as an income whether it is through mining or employment. There are some exceptions to that rule, however.
How are cryptocurrencies taxed?
Exactly how cryptocurrencies are taxed depends on the method you receive them, what you then do with them and whether you inherited them or not. You do not need to pay tax on crypto when you purchase it, but you may need to when you sell it.
If you receive cryptocurrency as a result of mining and do not trade it, then they are treated as a taxable income. This means you must submit a Self-Assessment tax return to determine if you need to pay tax or not. The taxable turnover for Self-Assessment tax is £1,000. If your cryptoassets are worth less than that then a return is not necessary.
Some companies are choosing to pay their employees in cryptocurrency. Before you can figure out your tax, check if your tokens are classed as readily convertible assets. If they are, your UK employer should pay the Income Tax and National Insurance contributions and deduct them from your wage like in any other job. If your tokens are not, then you will need to submit a Sel-Assessment Tax return.
Whichever bracket you fall under you must keep accurate records of your crypto dealings. You will need proof of the number and type of tokens, any relevant dates and their value in pounds.
Is there a way to avoid taxes?
There are some scenarios where individuals will not need to pay tax on cryptocurrency. Gifting cryptocurrency to anyone or even a charity is considered as any other type of gift and is not taxable.
Make sure that you report your crypto’s worth accurately. By overestimating the worth, you may be paying more tax than is absolutely necessary. On the other hand, underestimating the worth may result in some financial penalties which will cost you considerably more than the original taxes.
If you are unsure about your tax obligations then be sure to consult an expert in cryptocurrency tax affairs. That way, you can be sure that you are safe legally and can enjoy the thrill of cryptocurrency.