Crypto asset investors are to declare gains (and losses) in tax returns as the deadline looms.
The Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT) is reminding crypto asset investors to include their gains (and losses) in their 2021/22 tax returns as the January 31 deadline looms.
Did you know that Crypto assets, such as Ethereum, Bitcoin and non-fungible tokens, are as much subject to income tax and capital gains tax (CGT) as any other chargeable asset?
When an investor realises the value of a crypto asset for tax purposes and makes a profit over a certain amount (currently £12,300). They must pay CGT by January 31, following the end of the relevant tax year. Therefore, gains made in 2021/22 need to be reported by January 31, 2023, with all necessary taxes paid.
Likewise, if a loss has been realised, this can only be offset against other gains from the same or future years if they are reported to HMRC. Those who are trading in crypto assets, or receive them for services they carry out, will be subject to income tax on their profits.
The concern of CIOT and ATT is that many investors won’t be aware of these obligations or of the wide range of circ*mstances in which gains can be ‘realised’ for tax purposes. The phased reduction of the CGT annual exemption from £12,300 to £6,000 in April 2023 and to £3,000 from 2024 will only make the issue more acute.
Gary Ashford, Chair of the joint CIOT/ATT Crypto Assets Working Group:
“Crypto asset investors need to check carefully this month to ensure they are tax compliant.
“Not only can cryptocurrency investments trigger capital gains tax liabilities that are not obvious to the investor, but tax can be payable even where the investor does not think his or her crypto investments have been profitable.
“Selling, lending or ‘staking’ crypto assets – or potentially even just transferring assets between crypto sites and portfolios – will usually trigger disposal in the tax year in question, even if no cash is taken out and even if the portfolio now shows that there would be losses if all investments were cashed now. Events sincethe end of the tax year (since April 5,2022, for the gains that need to be reported this month)are irrelevant to the tax liability for that year, which is now closed.
“A further problem is that because tax laws were never written with crypto assets in mind, the tax treatments of some activities are unclear or controversial, so taxpayers and their agents need what little time there is leftbefore January 31to assemble information and think about the right way to report it on the tax return.
Do not ignore these problems, warns The Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT)
Between April 6 2022, and January 3 2023, the global cryptocurrency market capitalisation fell from $2,219 billion to $806 billion, according to sources:StatistaandSlickCharts.com.
HMRC has identified a risk of underreported gains in this area and specialises in crypto compliance.
“What is striking is that many taxpayers face unexpected issues from the tax rules governing crypto. Many low-income taxpayers will have invested in these assets. Barely a third will be professionally represented or have a good understanding of CGT. Nearly half have not seen any information/guidance on the subject. 84% of crypto asset owners won’t have sought tax advice.
“People resident in the UK but with a long-term ‘domicile’ elsewhere (non-doms) who are currently claiming the remittance basis may not realise that HMRC regard any crypto investments held by UK residents as UK situs assets, generating income and gains fully taxable in the UK also, if they use offshore income and gains to acquire a crypto portfolio. They could well be making remittances, thus triggering UK tax charges at their highest tax rate. Crypto assets are chargeable for inheritance tax purposes, another aspect non-doms need to be aware of.
Tax agents must ask their clients whether they have been investing in crypto. At the same time, Crypto investors who do not have tax agents need to consider taking advice on this.
“At the moment, crypto assets are not regulated commodities. So as well as being unaware of their tax obligations. Many people may risk losing their investments entirely with no recourse. The recent collapse of FTX shows the potential vulnerability and risks of disastrous consequential losses involved in crypto investment. This message needs to be conveyed to those unaware of those risks and cannot afford such losses.”
Top tips for Capital Gains Tax
Having spoken to a spokesperson at the CharteredInstituteofTaxation for guidance. I wanted to also share some top tips on how to manage this.
Treat Crypto like any other asset for Capital Gains Tax. You need to ask yourself. Are you trading or investing? You can get up to£1,000in tax-free allowances for property or trading income each tax year. You will need to submit a tax return before the end of January should you exceed this threshold. Declaring the profit/loss made when you sell the asset is classed as a ‘disposal’.
Now the current threshold for Capital Gains tax stands at £12,300. This is due to go down to £6,000 in April 2023 and £3,000 in April 2024. So you will need to track how much profit/loss you make. The Crypto market is currently unregulated, but don’t be caught out by HMRC on this one.
For anyone like me who made a loss. Declare this loss, which can be offset against any future profits. Good to know!
You must tellHMRCif you have:
- gross trading income over £1,000 –register for Self Assessment
- other gross income over £1,000 up to £2,500 –contactHMRC
- other income over £2,500 –register for Self Assessment
For any financial advice, please speak to a financial professional or HMRC.
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