Advice + Tax + Accounts for smart business owners.
April 28th 2021

Cryptoassets: trading or investing? Income Tax or Capital Gains Tax?

When you make some profits trading cryptocurrency / cryptoassets, you may be liable to pay Income Tax or Capital Gains Tax (but not both). But how do you know which set of tax rules will apply?

It's important to understand how your crypto profits are likely to be taxed, because Income Tax and CGT are charged at different rates and have completely different sets of rules about all manner of things (exempt amounts and losses just for starters). Currently, UK CGT rates are much lower than Income Tax rates. If you make the wrong assumptions, however, you could end up adopting the wrong strategies and end up paying far more tax than you expected.

So, what does HMRC have to say on this issue? If your crypto activities amount to a "trade" - in other words what you are doing is running a financial business, not just passively investing - any profits are going to be taxed under the Income Tax regime. For most people, that's bad news. If your crypto activities do not amount to a trade - in other words what you are doing is investing in cryptoassets, rather than operating a financial business - any gains are going to be taxable under the Capital Gains Tax regime. That's mostly good news, because CGT tax rates are lower than Income Tax rates, and you also get a separate CGT annual exempt amount that means you don't pay any CGT on the first £12k of chargable gains arising in a tax year.

What HMRC say (and I agree with) is that for there to be a "trade", the individual has to be engaging in a certain frequency of buying and selling, with a certain level of organisation and sophistication, so that the activity amounts to a financial trade in itself. (By the way, just because you describe a transaction as a "trade" does not, by any means, indicate that for tax purposes you are engaged in trading. That's just semantics)

It would be comparatively unusual for an individual's crypto activities to amount to trading - most individuals' crypto activities are unlikely to have the degree of frequency, organisation and sophistication required. That's generally good news because if you're not trading then you're investing - and that means any gains are taxed under the CGT regime.

Perhaps the main downside with being taxed under the CGT regime, as opposed to the Income Tax regime, is that if you make losses, your options to offset those losses are quite restricted under the CGT regime - generally you can only offset those losses against other capital gains arising in the same, or future, tax years. You can't offset those capital losses against your other income. With cryptoassets, losses are of course a very real prospect - just in the last week or so Bitcoin was 25% down at one point. That's an article for another day...

Check out our other blogs on cryptoasset taxation here.

If you require advice or assistance with tax and your cryptoasset activities, contact us today or drop by our Edinburgh or Kirkwall office.

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