The crypto-currency world is constantly evolving, with new coins and tokens hitting the market regularly. While some of these new offerings may be legitimate, many are nothing more than con tricks. Now the question arises of how the taxation of crypto-currency works. Given that the market is still relatively new, there is no definitive answer to this question. Whether you believe in crypto-currency or not, it is essential to understand cryptocurrency taxation and transactions. Here we will look at the possible ways to address the cryptocurrency taxation methods.
What is crypto-currency?
Any digital or electronic currency that uses cryptography to secure transactions is a cryptocurrency or crypto. Cryptocurrencies use a decentralized mechanism to track transactions and create new units. It is a virtual payment system that does not rely on banks to validate transactions. Payments made using cryptocurrencies are not physical currencies that can be transported and exchanged; instead, they exist only as digital entries to an online database detailing individual transactions. Digital wallets store cryptocurrency. A public ledger keeps track of all cryptocurrency transactions that involve money transfers.
How do cryptocurrency and taxation work?
Since crypto is a digital asset, the HMRC classifies it as equivalent to stocks, bonds, and other financial assets. The money you make is liable to tax at various rates, either as capital gains or income depending on how you acquired your cryptocurrency and how long you kept onto it. Certain ordains set by HMRC cause taxable events for the owners. Therefore, the most critical aspect of comprehending crypto taxes is understanding the events that result in the taxes.
When is cryptocurrency taxed?
According to interface accountants You have to pay national insurance and income tax on any cryptocurrency income received in the UK, just as you would for payments made in GBP.
Here are some scenarios that will make you liable to pay tax according to HMRC:
Selling crypto with capital gains:
Buying crypto and withholding does not make you susceptible to tax, however, selling it and gaining capital profit from it incurs a surcharge. You may get a deduction of that loss from your taxes if you sell it at a loss.
For example, if you buy crypto for $16000 and sell them after three months for $1800, the extra $2000 profit you gain is liable to short-term capital gains rate to the tax rate. Depending on your revenue, it could range between 0% and 37% for the 2022 tax year.
You would be liable to pay long-term capital gains taxes if the analogous exchange occurred a year or more after the cryptocurrency purchase. The 2022 tax year would be 0%, 15%, or 20%, depending on your total taxable income.
Cryptocurrency taxes function in the same manner comparable to taxes on other types of property or assets.
Mining cryptocurrency:
Suppose you use a decentralized computer network to verify transactions in the blockchain. The profit you make on these mined crypto coins is liable to tax. Mining cryptocurrency can classify as a hobby as well as a legitimate business based on these several factors:
- Organization
- Degree of activity
- Risk
- Commerciality
Mining as a business:
If your mining activity is a business, the mining revenue will include trading earnings and be liable for taxation on cryptocurrency.
Mining as a hobby:
If you can classify your mining operations as a hobby, report your revenue on your tax return under miscellaneous income. It will reflect the cryptocurrency’s fair market value the moment you get it. Your taxable income will also include any awards or payments for mining activities.
Staking:
Like mining revenues, stake awards are subject to taxation depending on their fair market value on the day they were received, with any reasonable expenditures decreasing the chargeable amount. Some people may claim it as savings income or personal saving allowance. If you think about doing this, talk to a tax accountant based in the UK since if you sell it later, capital gains tax regulations could be applicable.
Trading crypto:
If you’re getting paid in crypto for your goods or services, you must pay income tax and social security obligations regardless of the cryptocurrency you are paid in or who pays you.
Crypto tax amount you need to pay as Income Tax:
You must pay at least 20% tax on your cryptocurrency income if your earnings are already higher than the personal allowance of £12,570.
Let’s find out how to calculate your crypto tax obligations for income in just three easy steps.
Find out which of your transactions are classified as income according to HMRC:
For reference, the following cryptocurrency profits are listed as profits:
- Trading cryptocurrency for GBP in the UK
- Crypto for crypto exchange
- Getting crypto as a gift (except for spouse or civil partner)
- Purchasing products and services with cryptocurrency
Now calculate the profit once you’ve noted which cryptocurrency transaction needs you to pay capital gains tax.
Calculate the cost basis of any crypto transaction:
It is the amount you paid for crypto and the additional transaction fee.
Deduction of cost basis from the value of crypto at disposal:
The cost basis of your currency is the difference in the value of your cryptocurrency at the moment of purchase and selling, giving, or exchanging.
Check the rates of capital gains you need to pay:
You may be required to pay a crypto tax rate in the form of capital gains tax based on the income tax bracket you fall under.
The stats below show the rates for capital gains tax:
- 10% Basic Rate Income Band (up to £50,270)
- 20% Higher Rate Income Band (up to £150,000)
- 20% Additional Rate Income Band (more than £150,000)
Getting ready for cryptocurrency taxation in the UK:
Analyze all of your cryptocurrency taxations. You must disclose any earnings or gains while preparing your cryptocurrency paperwork. Keep track of everything, including the amount of cryptocurrency you bought, sold, traded, gifted, or otherwise spent in GBP.
Crypto tax software for the UK:
You can get help from several online resources for revenues and liabilities, with an additional free feature of a cryptocurrency tax calculator for the UK. Software like Koinly, TokenTax, and Coin Tracker may scrape data from exchanges to calculate your tax liability.
Get personalized tax advice from crypto tax accountant UK:
Getting crypto tax guidance from a crypto tax accountant in the UK will help you if you’ve been on a price surge and anticipate making significant income or profits. Tax accountants will provide you with professional advice so that you will be able to take advantage of the best legal risks in your situation.