If you’ve invested a considerable amount of money, time and energy into buying and selling cryptocurrency, you may be considered a trader and HMRC will apply Income Tax to your profits.
Depending on how much you’ve earned from trading, Income Tax will be applied at marginal rates of 20% (£11,851 - £46,351), 40% (£46,351 - £150,000) or 45% (over £150,000).
If you’re considered a trader by HMRC, you’ll need to set yourself up as a ‘Sole Trader’. It’s worth speaking to a tax professional to see whether you’ll be considered a trader by the taxman.
Capital Gains Tax
If, as an individual, you’re holding cryptocurrency as an investment, it’s treated as a foreign currency. That makes you subject to Capital Gains Tax.
The total value of your cryptocurrency tax won’t be taxed – just the amount of money you’ve gained through the investment.
It’s worth noting that in the UK, if HMRC views your investment in cryptocurrency as highly speculative, then you may not be subject to tax. Similarly, profits and losses from gambling aren’t taxable.
The most important thing is to keep a CSV file of all your trades and maintain a record of their value.
THE UNITED STATES
Unlike the UK, the US treats all cryptocurrencies as a capital asset, similar to stocks, bonds and property. This means they’re subject to ‘Capital Gains Tax’, regardless of whether you use them for trading and investing, or for purchasing goods and services.
For cryptocurrency, the following instances are viewed as taxable events in the US:
- Trading cryptocurrency for fiat currency like the US dollar (currency that’s legal tender but isn’t backed by a physical commodity).
- Trading cryptocurrencies. You’ll be taxed on the market rate of the cryptocurrency at the time of the trade.
- Using cryptocurrencies for goods and services. Similarly, you’ll be taxed on the market value of the purchase at the time of the trade.
The following instances aren’t regarded as a taxable event in the US:
- Gifting someone cryptocurrency, as long you don’t exceed the gift tax threshold.
- Wallet-to-wallet cryptocurrency transfers.
- Buying cryptocurrency with USD. If you hold onto your cryptocurrency for longer than a year, you’ll be applicable for Long-Term Capital Gains Tax, which is roughly half that of the Short-Term Capital Gains Tax.
The most important thing to do is to keep a record of every trade and transaction you make with cryptocurrency, with the market value of those trades and transactions at the time.