Source: Crypto Valley Live
Author: Robin Singh
Translation: Zoe Zhou
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The British tax season is here. Digital currency investors need to be prepared this season to properly submit their digital currency tax returns. There are many signs that the HMRC is beginning to take drastic measures against digital currency tax evaders.
In 2018, after the UK's Cryptoassets Taskforce submitted a special report, the first digital currency guide was published. This is a joint initiative of the UK Department of Taxation and Customs, the Financial Conduct Authority (FCA) and the Bank of England. These guidelines clarify some important details of how the UK Revenue and Customs Authority views digital currencies. Many people see this guide as a prelude to more stringent tax measures on digital assets.
The UK Department of Taxation and Customs also sent requests to some of the major digital asset exchange centres, including Coinbase, to obtain information on transactions by British investors on the exchange in August 2019. This coincided with measures taken by the IRS before issuing a warning letter to suspected digital asset tax evaders.
All this shows that the UK Revenue and Customs Authority seems to be taking the tax avoidance of digital assets seriously. This means that tax filings will become even more important this year. Here are some of the most important things you should know about UK crypto taxes.
Digital currency is an asset
In fact, cryptocurrency is a digital currency. When it comes to taxes, however, the UK's Revenue and Customs Service considers digital currency as an asset. This means that trading digital currencies is subject to capital gains tax. This classification is being widely adopted by tax agencies; even the IRS treats digital currency as property with tax purposes, not currency.
When are crypto transactions taxable?
The UK's Revenue and Customs Authority has stated that every sale of digital currency is subject to capital gains tax. The sale here means:
- Sell fiat currencies (such as British pounds) in exchange for digital currencies;
- Exchange digital currency for another digital currency (for example, sell BTC in exchange for ether);
- Give digital currency to someone other than a spouse or same-sex partner. In this case, the value of the digital currency on the gift date will be used as the sales value.
It is important to remember that digital currencies are not subject to capital gains tax for charitable donation purposes. Of course, if the donation is fraudulent, or if the digital currency is sold to a charity at a price higher than the acquisition cost, capital gains tax will be levied on the transaction.
How much tax do I need to pay?
The actual capital gains tax paid will depend on your income tax level and marginal tax rate. Keep in mind that there is a tax-free limit of £ 11,700 per person: if your earnings are below this amount, you do not need to pay any capital gains tax. If the value of the digital asset you ultimately sell exceeds four times the tax-free limit (ie, £ 46,800), you will still need to report capital gains in the tax return even if the actual income is below the tax-free limit.
How to calculate capital gains tax?
In the UK, digital currency revenue is calculated through a shared pool. When it comes to taxes, most people are more familiar with accounting methods such as first-in-first-out and last-in-first-out. However, the calculation method of the shared pool is slightly different. It determines the cost of selling assets based on the average cost of all current assets.
There are also additional rules such as day rules and 30-day "accommodation and morning" rules to prevent people from getting tax losses. For example, people sell assets at low prices and then buy them back to maintain taxable losses.
Airdrop, mining, staking, and other forms of crypto income
Crypto transactions are also carried out in other forms, such as:
- Miners obtain digital currency through mining;
- Users can receive digital currency through airdrops;
- Some employers use digital currencies instead of fiat currencies to pay employees and freelancers.
In each of these cases, you must pay income tax and national insurance. When you trade these assets, you must also pay capital gains tax in a similar manner as discussed earlier. When the United Kingdom is preparing to levy digital currency taxes, it is important to separate the source of digital assets, because the UK Revenue and Customs has clearly included hard fork revenue and airdrop revenue as tax revenue.
Digital currency transactions as part of the business
If you consider trading digital currencies as part of your business, then trading profits will be subject to income tax. Such trading is similar to trading in securities, stocks, and other financial instruments. The UK Revenue and Customs Revenue Handbook (BIM56800) details these transactions.
Make sure transaction records are correct
The UK Revenue and Customs Authority recommends keeping detailed records of all digital currency transactions. Since transactions between digital currencies and digital currencies are subject to tax, you will need to calculate the value of the digital currency at the time of sale-if you use a robot for transactions, this may cause the calculation to be very time consuming.
Another thing to consider is that digital currency exchanges do not always provide a complete transaction record. Therefore, you'd better record your transactions proactively. Now, there are also some tools, such as Koinly, Cointracking, Lukka, BitcoinTaxes, etc., which can record transactions for accurate tax payment.
Taking into account that the UK Revenue and Customs Authority has clarified the relevant regulations on crypto taxation and has begun to ask digital currency exchanges for information on UK traders. This means that crypto tax related work is on track. If your encrypted tax return is not up-to-date, you should correct it in a timely manner.