Understanding Crypto and NFT Taxes in the UK

Tax can often feel like a maze. But when it comes to the virtual world of cryptocurrency and NFTs, it gets even more complex. Proactive Investors website has a new guide to help you make sense of it.

A Taxman’s View on Cryptocurrency and NFTs

Just like with your regular income, the taxman is interested in what you’re earning and spending in the digital realm. While cryptocurrencies and NFTs might seem like a space-age concept, the basic principles of taxation still apply.

1. The Basics: What Taxes Apply to Cryptocurrency?

First things first: if you’re investing in cryptocurrency, whether you’re buying Bitcoin, Ethereum or any other type, you’ll need to know about Capital Gains Tax (CGT). Essentially, this tax is charged on the profit you make when you sell your cryptocurrency.

But it’s not just about selling. “Disposal” of cryptocurrency can also mean exchanging one crypto for another, using it to buy goods or even gifting it to someone. And here’s a kicker: even if you’re dealing with crypto on a foreign platform, the UK tax rules still apply. So, there’s no dodging the taxman by trading abroad.

2. Calculating Taxes on Cryptocurrency

Let’s break it down:

  1. Work Out Your Profit: Start by subtracting the amount you originally paid for the cryptocurrency (including any associated costs) from the amount you sold it for.
  2. Account for Any Losses: Deduct any capital losses you’ve made on other investments.
  3. Are You Eligible for a Discount? If you’ve held onto your cryptocurrency for over a year, you might get a discount of up to 50% on your taxable amount.
  4. Your Final Taxable Amount: Once you’ve taken into account all these factors, you’ll be left with your net capital gain. This is the amount you’ll be taxed on, according to your regular tax bracket.

3. What if You’re Trading Regularly?

If you’re buying and selling crypto often, aiming to make a quick buck, then you might be considered a trader rather than an investor. This distinction is crucial because traders are taxed differently. While investors deal with CGT, traders will have their profits treated as income and taxed accordingly. But how do you know if you’re a trader? It’s about more than just the frequency of your transactions. Having a business plan, a registered business name or even specific qualifications can play a role.

4. Can You Offset Cryptocurrency Losses?

Here’s some good news: if you’ve made a loss on your cryptocurrency investments (i.e., you’ve sold them for less than you bought them), you can use this loss to reduce any other capital gains you might have. And if you don’t have any other gains? You can carry the loss forward to future tax years.

If you’ve been scammed or lost your coins through theft, the value of this loss can also potentially be claimed.

5. The Myth of the ‘Personal Use Exemption’

Some people believe that if they buy cryptocurrency worth up to $10,000, they can dodge CGT using the ‘personal use exemption’. This isn’t quite true. This exemption only works if you can prove that you used the crypto for personal purposes, like booking a holiday or buying a car. And even then, if your investment exceeds the $10,000 limit, CGT will be due.

6. Keeping Track and Paying Your Tax

The golden rule? Always, always keep detailed records of your cryptocurrency transactions. This includes the date, value in GBP at the time of transaction, and details of the other party involved.

Remember, the ATO can access data from UK-based cryptocurrency platforms. So if they find a discrepancy between their records and your tax return, expect to hear from them.

When it comes to payment, you’ll usually need to pay any owed tax after you’ve filed your tax return for that financial year. Depending on whether or not you’re using a tax agent, your payment date might vary, typically falling between March 21 and June 5 of the following year.

Diving Into the World of NFTs

NFTs, or non-fungible tokens, are the new kids on the block(chain). They’re unique digital assets that represent ownership of various items, from digital artwork to video clips.

The tax principles here are similar to cryptocurrency. If you’ve bought or created an NFT as an investment, you’ll be looking at CGT. But if you’re in the business of creating or selling NFTs, then it’s likely to be treated as income.

For instance, if an artist sells NFTs related to her artwork, the income from this is considered business income. But if an individual buys one of these NFTs for their business, it becomes a capital asset and is subject to CGT upon its sale.

Final Thoughts and Next Steps

Cryptocurrency and NFTs are fascinating and can offer a new way to diversify your investments or express your creativity. But with these opportunities come responsibilities. Always remember to keep clear, comprehensive records of your transactions and consult with a tax professional if you’re unsure about anything. After all, it’s better to be safe now than sorry later.