Most (if not all) of us are investing in Crypto with the intention of making profits. Profits are great, but once an individual starts making money the tax man is not far behind. Now of course we all want to minimise our tax burden while at the same time obey the law. There is nothing wrong with tax avoidance and everything wrong with tax evasion as defined here:
“Tax evasion means concealing income or information from tax authorities — and it's illegal. Tax avoidance means legally reducing your taxable income.”
The following are some guiding principles that I am looking to follow.
The fact is that profits are subject to Capital Gains Tax, which in the UK at the time of writing stands at up to 28%. Here is an example from the Inland Revenue’s own website
Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,600. Your gains are not from residential property.
First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2020 to 2021 tax year the allowance is £12,300, which leaves £300 to pay tax on.
Add this to your taxable income. Because the combined amount of £20,600 is less than £37,500 (the basic rate band for the 2020 to 2021 tax year), you pay Capital Gains Tax at 10%.
This means you’ll pay £30 in Capital Gains Tax.
This may all seem a bit complicated, but let’s get back to crypto.
Your Wallet is Your Centre
Everybody who trades in crypto has at least one wallet (whether it be Coinbase / Atomic / Upload or another it doesn’t really matter). When you first started trading you introduced Capital. This can be considered as a loan and can be used as an offset to ensure tax is only applied to profits.
However, unless holding a fiat currency your wallet fluctuates wildly as crypto values move. This makes it impossible to declare with certainly. Consider the following values of just one crypto currency over the last few weeks. I have used Maker as my example with the initial purchase being made on 21st June 2020.
Maker Prices according to https://www.coinbase.com/
So how do you declare this?
The fact is you can’t. It would be unfair to pay tax on £1000 (introduced Capital by the way) when it is only worth (at worst in the given example) £825.70 and if you cannot declare it when it is going down the same principle applies when it is going up. This is absolutely true while it remains in your wallet as a crypto and therefore it only makes sense when withdrawing it.
Capital Gains Tax only applies to sales of assets which you should record diligently, just in case the tax man wishes you to pay taxes on it anyway. Remember it should always be offset against the capital introduced until your crypto income exceeds it. Then you pay back the ‘loan’ and taxation starts there.
However, one of the alternatives is focus only on income that is drawn from your wallet back into your regular bank account as it is clear profit (unless you have decided to cut your losses and get out in which case the offset against Capital introduced applies). While it is retained in your wallet it can be considered to be an Investment Fund.
Probably the best alternative is to set up as a sole trader, which means filling in a self-assessment form every year and in this case tax is applied and calculated on profits anyway.
Always remember that you have a tax free allowance, that has to be used up before paying taxes so if yours has been used up why not consider making your partner the beneficiary if theirs hasn’t been fully utilised.
If there is more interest in the community in exploring this further I can write more on the subject.
I am an experienced business owner, familiar with completing self-assessment tax forms and calculating VAT, Income Statements and other financial statements, not only for myself, but also for other business services. I have also advised on the setting up of the financial system for at least one charity (Passion Cambodia) and remain up to date with the latest financial requirements. Please note this is taking into consideration the UK-Tax regime and while I offer such advice I strongly urge you to check out the best practice(s) for yourself.
Stay Legal Stay Safe. Think about how you structure your income and declare it correctly.