Traded with Bitcoin? Brace Yourself for Capital Gains Taxes

As the cryptocurrency industry continues to grow and evolve, so too do the tax laws surrounding these digital assets. As someone who actively trades Bitcoin, it is your responsibility to stay up-to-date with current tax laws implemented by Her Majesty’s Revenue and Customs. Recently the HMRC requested information about crypto traders on several UK based crypto exchanges such as CEX.io and eToro, chances are if you traded on one of these you will soon find a letter from the HMRC waiting in your postbox. If you did not file your taxes now would be a good time to brush up on the basics of crypto taxes in the UK.

If you live in the U.K. and currently trade or have traded crypto over the past year, here are some of the Bitcoin tax guidelines that you need to know for the next filing period.

Photo by André François McKenzie on Unsplash

Crypto As a Tradeable Asset: How Capital Gains and Losses Affect Your Earnings

When you invest in crypto with the intent of treating it as an investment, which can then be traded at a later date for profit, your Bitcoin profits are considered to be capital gains. However, there are other taxable events that fall into the “capital gains” category as well. This includes:

• Exchanging your Bitcoin for other cryptoassets
• Using your Bitcoin to pay someone else or to pay goods and services (If you spend Bitcoin for business operations, you may be able to claim deductions when filing.)
• Giving your Bitcoin to another person

The only event that is considered to be tax-exempt by the HRMC is the donation of Bitcoin assets to a charity, which is only applicable if you are not benefitting from your donation or realizing a gain as a result of the transaction.

The good news for Bitcoin users is that cryptoassets can often be pooled together rather than having to be taxed as an individual event each time. For example, let’s imagine that you purchased £1,000 of Bitcoin in January and purchase an additional £200 in September, selling some of your Bitcoin later in the year.

Instead of having to determine which transaction the coins belong to, all of your purchases are pooled together and considered to be a single investment resource. The only time these pooling rules change is when you acquire Bitcoin within 30 days of a sale. If you sell Bitcoin and then buy more Bitcoin within 30 days of that sale, these new assets are treated as a separate pool.

Another potential situation to consider are Bitcoin forks. If Bitcoin undergoes another hard fork and you receive a new asset as a result, this is considered to be a capital gain. Keep in mind that if you incur any losses as a result of exchanging your assets, you can report these capital losses to reduce your overall capital gains.

Double Taxation: Crypto Income Is Still Income!

Although the HRMC specifically states that cryptoassets are not considered to be currency or money, that does not mean that you are exempt from reporting income that is produced by crypto-related activities. The question for many, however, is in regard to what constitutes income. If you have engaged in any of the following, you are subject to income tax on your Bitcoin.

• You have received Bitcoin from an employer, a client, or a customer as a form of payment for goods and services
• You trade Bitcoin regularly, which would be considered a source of income rather than and investment
• You have mined Bitcoin regularly over the past year
• You have received an airdrop of Bitcoin (not applicable if you received these funds in a personal capacity)

As a general rule, any cryptocurrency that you receive as a result of business or service-related tasks is considered income. Because Bitcoin’s value can depreciate, however, you can still claim losses after these taxable events have occurred.

What Happens If I Lose My Crypto? Other Considerations

There are some situations in which you may lose your private keys or become a victim of fraud or theft. If you lose your private keys and are unable to access your Bitcoin wallets, you may be able to file a negligible value claim if you prove that there is no possibility of recovering your assets.

If you are a victim of fraud or theft, however, you may only be able to file capital losses if you pay for Bitcoin but do not receive it. If Bitcoin is stolen from you, you still owe the HRMC.

What Now? Preparing for Next Year’s Tax Season

Now that you have a better idea of what taxes you may be dealing with, you are going to want to prepare for next year’s tax season by collecting all of your relevant investment information and finding a cryptocurrency accountant who can help you file for your income and capital gains.

As long as you have all of your records and a high-quality accountant on your side, your Bitcoin taxes will be a breeze!

This is a guest post by Robin Singh – the co-founder and CEO of Koinly.io – a cryptocurrency tax solution that solves capital gains reporting in the UK.