22:00 | 08/03/2021 Print
|Facts about The New Bitcoin Tax Rules and Tax Guide for you|
Like any form of asset, there are various UK tax implications from buying and selling cryptoassets, including Bitcoin.
Investing in Bitcoin is just like investing in any other capital asset, like a home. Because Bitcoin is currency, it’s considered property. According to IRS guidance, virtual currency acts as “a medium of exchange, a unit of account, and/or a store of value.” The IRS goes on to say that virtual currency can be used at a medium of exchange to buy and sell goods, but it doesn’t have legal tender status in the U.S.
Virtual currency, again, is treated like property for tax purposes. So principles that apply to property transactions, like buying or selling a home, also apply to buying, selling, and using virtual currency like Bitcoin and other cryptocurrencies.
The terminology that applies to virtual currency transactions also applies to other transactions. If you’ve ever sold a home and had to pay taxes because of that, you’ve heard some of these terms.
The first is capital asset. This is anything you own, including stocks, bonds, your home, and your cryptocurrency. The basis is the amount you paid to purchase the property, including any fees that you paid.
Capital gains and losses are the profit or loss you can make on the property. These gains or losses are unrealized when they’re still just on paper. When you actually sell the property, though, the capital gains or losses become realized, and that’s when they have tax implications.
Short-term gains are realized gains on any investment that you held less than a year before selling. Long-term gains are realized gains on assets you’ve held for more than one year before selling. These are important because they’re taxed differently.
Is all of this as clear as mud? Here’s a quick tutorial to illustrate the terms:
Let’s say you buy one bitcoin for $10 (yes, I know, that’s now impossible). You pay a $1 fee during the purchasing process. Your basis is $11. In a year, the bitcoin is worth $100. You hang on to it longer, you have an unrealized capital gain of $89. After another year, it’s worth $189, and you sell the bitcoin. You now have a realized long-term capital gain, which is now taxable.
When it comes to filing taxes for anything, it’s really all about having the right information available when it’s time to file. For bitcoin and other cryptocurrency, the information you need includes:
As you can see, keeping good records of cryptocurrency transactions is essential. This is one reason many people use the same cryptocurrency exchange option, so that the records are easy to dig up.
Using this information, you can figure out how much tax you’ll pay on your bitcoin. This is also a helpful exercise to walk through if you’re just considering selling some bitcoin. You’ll want to know what taxes will look like before you make the decision to sell.
One weird quirk about bitcoin is that you technically sell it even if you’re using it to purchase something directly. When you sell your bitcoin, the IRS considers that selling the bitcoin for cash and then using the cash. So you’ll need to pay taxes on the bitcoin you sold, even if you technically used it to purchase something.
And, yes, this is true even if you’re shopping somewhere like Overstock.com, which directly accepts Bitcoin as a method of payment. Because cryptocurrency isn’t considered legal tender in the U.S., all bitcoin transactions trigger potentially taxable events.
For this reason, you want to keep track of more than just bought and sold dates if you’re using cryptocurrency for everyday transactions. You’ll also need to keep track of when you use the bitcoin and what its value is when you happen to use it.
Something similar can happen if you use physical property during a transaction. But it’s less common to do this with other types of property versus cryptocurrency. So be sure you keep incredibly detailed notes about when you buy, sell, or just use cryptocurrencies like Bitcoin.
So if you’ve triggered taxable events with your bitcoin this tax year, your taxes will depend on the circumstances and your personal tax bracket. Here’s how it works:
This is the best case scenario. Long-term capital gains are taxed at a lower rate than your actual income tax, but the rate depends on your tax bracket. The 2017 Tax Cuts and Jobs Act goes into effect for 2018 taxes. The act changes the way capital gains taxes are assessed slightly.
Long-term capital gains taxes used to work based on your tax bracket. That’s no longer the case. Now, you’ll pay either 0%, 15%, or 20% on long-term capital gains, depending on your maximum taxable income level. For instance, single taxpayers making up to $38,600 will pay no long-term capital gains taxes. Single taxpayers making between $38,600 and $425,800 will pay 15%, and single taxpayers making over $425,800 will pay 20%.
In short, the majority of taxpayers will pay 15% on long-term capital gains. But you may pay more or less depending on your income.
So if you do a pure buy-hold-sell transaction on Bitcoin, it’ll work like this. Say you buy a Bitcoin for $1,000 on January 1, 2016. You sell it for $2,000 on January 1, 2018. Your capital gain would be $1,000, and you’d pay either $0, $150, or $200 in taxes on the sale come tax season.
What if you buy a Bitcoin and only hold it for six months, or even 364 days? If you sell it for a gain, that’ll be taxes as a short-term capital gain. Short-term capital gains are considered regular income, so they’re taxed at your regular income tax rate. So if you’re in the 24% tax bracket, you’d pay $24 on a $1,000 short-term capital gain.
The way the cryptocurrency market is going these days, you shouldn’t be looking at any losses. But if you do lose money in a cryptocurrency transaction, you’ll deduct the loss on your return. It’s possible to deduct capital losses even if you just take the standard deduction. The deduction’s amount will depend on your tax bracket. But you can only claim up to $3,000 per year in capital loss deductions, so keep that in mind when you’re considering selling Bitcoin at a loss.
All of this can seem more confusing when it comes to using Bitcoin or other cryptocurrency to actually make a purchase. But it’s actually fairly straightforward. Let’s say you buy a coin for $1,000. Then you use it to purchase $2,000 worth of kitchen remodeling goods on Overstock.com. That transaction will trigger a capital gains tax on $1,000 worth of capital gains.
Why? Because it’s as if you sold the coin for $2,000 and then turned around and bought something with the resulting cash. Again, this is the case even if Overstock accepts cryptocurrency directly.
It’s similar to cashing out a stock and then using the resulting money to purchase something. The IRS doesn’t really care what you do with the money you get. They just want you to pay taxes on the gain.
Cryptocurrency offers a couple of other interesting scenarios to consider from a tax perspective. One is mining coins. When you mine a new coin, it’s considered income according to the fair market value of the coin on the day you mined it. So you’ll count this as another type of income on your taxes.
When you receive payments in cryptocurrency, that also counts as income according to the fair market value of the currency on the day you get paid. And when you exchange one coin for another, it triggers taxable events just like using cryptocurrency to buy goods. It’s like you sold the currency for cash and then used the cash to purchase more currency.
Some people are migrating towards Bitcoin and other cryptocurrencies because they’re interesting and maybe a good investment. Others are migrating this way because they believe less government oversight is a good thing. Regardless of why you’re using or investing in Bitcoin, you should care about the tax implications.
The IRS is paying close attention to cryptocurrency users now, after the vast majority haven’t paid taxes on their crypto transactions. Failure to pay your taxes involves potentially steep penalties and fees–not to mention endless letters from the IRS. So be sure you understand how to pay taxes on your Bitcoin, when you should do so, and how much tax you should pay.
The Guide of Abby Hayes
Abby is a freelance journalist who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three. She has a B.A. in English Literature from Indiana University–Purdue University Indianapolis, and lives with her husband and children in Indianapolis.
David Britton, a tax partner at accountancy and business advisory firm BDO, answers some the most common questions currently being asked.
This is based on the assumption that the individuals and businesses referred to below are UK based and it does not cover the UK corporate tax consequences for companies.
In short, the answer is yes.
In December 2019 HM Revenue and Customs published their guidance document on cryptoassets for individuals, covering 'exchange tokens' (exchange tokens are intended to be used as a method of payment and encompasses cryptoassets like Bitcoin) and HMRC make it very clear that profits from buying and selling Bitcoin and any other cryptoassets are subject to tax.
Broadly, the rules are as follows:
- Anyone buying and selling Bitcoin in an individual capacity is most likely to be subject to UK Capital Gains Tax (CGT) on any gains made.
- For those who are considered as trading in cryptocurrencies (i.e. buying and selling with a high frequency), Income Tax may be due on the profits as trading income. HMRC’s view is that only in exceptional circumstances would it expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade.
- For those who receive cryptoassets as a non-cash payment for employment, there are Income Tax and National Insurance Contributions (NIC) implications to consider as you have with cash payments.
For the vast majority of individuals who are buying and selling Bitcoin or other cryptoassets, they are more likely to be within the scope of CGT rather than income tax. However, the facts of each specific case will determine the position.
If you receive cryptoassets from your employer as a payment for services performed in the UK, it is clear that this counts as earnings and income tax and NIC will apply based on the value of what you receive.
Crypto assets such as Bitcoin - where there is a tradable market - are considered ‘readily convertible assets’. This means that the primary taxing obligation lies with the employer in a similar way to withholding taxes on a cash salary.
This can present administrative difficulties as the value of Bitcoin can fluctuate and some of the Bitcoin will need to be sold to pay a cash equivalent over to HMRC. We have seen some technology companies pay their employees in this way, but it is rarely any more efficient to do so than paying cash.
If you are a self-employed consultant (i.e. not an employee), and receive Bitcoin for consultancy work, the responsibility for reporting and paying income tax and NIC lies with the individual via their annual self-assessment tax return.
It will depend on your personal circumstances.
Generally speaking, if you are tax resident in the UK, and you make gains of over your CGT annual exemption (£12,300 for 2020/21) you will need to report and pay CGT via a UK annual self-assessment tax return.
If your gains fall within your CGT annual exemption, you may still need to report the gains where the proceeds exceed four times the annual exemption (i.e. £49,200 for 2020/21), or where you have other capital gains or losses.
Generally speaking, if you make gains of over your CGT annual exemption (£12,300 for 2020/21) you will need to report and pay CGT via a UK annual self-assessment tax return
HMRC now receives information direct from UK crypto exchanges/platforms and so not disclosing transactions will most likely result in a HMRC enquiry and could lead to HMRC imposing penalties and costing you more.
For example, last year Coinbase, the digital currency exchange, confirmed that it had shared with HMRC details of UK resident users who have used its platform with Crypto transactions of £5,000 or more in the 2019/20 tax year.
HMRC has allocated resources to ensuring the tax due on cryptocurrencies transactions are declared through collaboration with their international partners.
The J5 (Joint Chiefs of Global Tax Enforcement comprising Australia, Canada, the Netherlands, USA and the UK) are also already sharing information on the use of cryptoassets and foresee more information being shared globally in the coming years in a co-ordinated effort to tackle tax crimes.
As a result, we expect to see an increasing number of HMRC enquiries focussing on those who buy and sell cryptoassets.
Only last month HMRC commenced a consultation with industry and stakeholders on the regulatory approach to cryptoassets. The aim of the consultation is to create a more agile regulatory framework which supports innovation and competition while reducing risks to consumers.
If you are uncertain whether your profits and gains from cryptocurrency should be included on your tax return, or if you have undeclared historic profits or gains arising on crypto transactions, you should consider seeking advice as this is a rapidly developing area of tax.
It is always preferable to make a voluntary disclosure to HMRC to correct errors or omissions rather than wait for HMRC to make contact. This will likely lead to lower financial penalties (if due) and may also reduce how far back the disclosure covers.
Whilst the appropriate route to disclosure will turn on the specific circumstances, HMRC do have online disclosure facilities which are likely to be appropriate in most cases where a correction is required.
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