Yahoo Finance What you need to know about crypto profits and HMRC
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Investors must record every crypto transaction they make or fall foul of the latest HMRC cryptocurrency rules.
Cryptocurrency users now face the "nightmare" task of recording gains and losses on every transaction they make, which could be in the thousands per day if they use automated trading software.
New HMRC rules for the UK demand cryptocurrency investors pay capital gains tax on profits above the annual allowance of £12,300.
However, if profits do not breach the £12,300 allowance investors must still report their gains on their yearly tax return if they are registered for self-assessment.
Tax expert at Tilney Smith & Williamson James Carn said: "Whether you need to declare crypto-asset holdings to HMRC depends on the amount of any realised gains and losses, together with gains and losses realised in the tax year on any other assets.
"HMRC considers cryptocurrencies to be assets because typically they are held as investments, however speculative."
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Investors can also offset their losses against other capital gains in their portfolio, Carn said.
Users of crypto need to be aware that even where crypto-assets are used as a currency to buy things "there is a disposal for tax purposes, which may contribute to a capital gains tax liability".
Technical officer Helen Thornley at the Association of Taxation Technicians told Yahoo Finance UK that the penalties for those that fail to adhere to the rules will “depend on various factors, such as how much tax has been underdeclared and how cooperative the taxpayer has been".
"So if a taxpayer volunteers that they have amounts undeclared, it will place the investor in a better position with HMRC," said Thornley.
She added that it could be “a nightmare for taxpayers to calculate their yearly capital gains when every crypto transaction must be taken into account and it certainly is a lot more complicated than reporting the capital gains on selling a house, as you do not do this multiple times in one day”.
She warned the some common crypto transactions are not tax-free, including “selling cryptoassets for fiat money, or exchanging one cryptoasset for another, is a disposal of bitcoin for capital gains tax purposes, as is paying for goods or services with cryptoassets”.
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HMRC have a checklist for investors to check if they need to pay tax when they receive or sell cryptoassets.
The first step is to keep separate records for the type of tokens you buy and sell, the date on which you make transactions, and the number of tokens involved.
Records must also include the number of tokens you have in total, their value in pound sterling and bank statements showing cashing out into fiat currencies and the date in which you disposed of the crypto tokens.
HMRC also advised investors to keep other records such as wallet addresses as the tax authority might ask to see your records if they carry out a compliance check.
Crypto assets received via mining are also treated as taxable income, and a self assessment tax return will need to be completed in pound sterling values of the tokens mined unless the cryptoassets are worth less than £1,000.
If you make a profit from selling a crypto asset HMRC will take into account "allowable costs" which can be deducted from the about of capital gains you have accumulated.
Read more: Can you live in London for 24hrs using only bitcoin?
"Allowable costs" include, transaction fees paid before the transaction is added to a blockchain, advertising for a buyer or seller, drawing up a contract for the transaction, making a valuation so you can work out your gain for that transaction.
You can also deduct costs if "you’ve already deducted against profits for income tax and the cost of mining activities, like equipment or electricity".
Paying capital gains tax to HMRC can be done by completing a self assessment tax return at the end of the tax year, or by using the capital gains tax real-time service that allows for immediate reporting of gains or losses.
