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What are the tax implications of trading cryptocurrency?

If you have taken advantage of the recent gains to be made by purchasing cryptocurrency such as Ethereum or bitcoin, you may need to consider how you will cover the tax bill for profits made. If you have made substantial gains as many that trade in cryptocurrency have, then you could be faced with a large bill.

In the eyes of the HMRC any crypto profits are viewed as a disposal for capital gains tax purposes. This includes selling cryptocurrency tokens for fiat currency or trading between digital assets. However, until the asset is cashed out, or in other words left to sit on the exchange or in a digital wallet, there will be no tax payment required.

So what does this mean for those trading in cryptocurrency and digital tokens? Basically, you are required by HMRC to declare any taxable gains and payments on all types of crypto assets – including exchange, utility and security tokens, and stable coins. HMRC has recently targeted cryptocurrency and any evasion of tax payments can result in hefty penalties. So it is wise to make sure that you are meeting any and all tax obligations to avoid getting into trouble.

How is cryptocurrency taxed?

Generally speaking any profits made from crypto trading will be subject to capital gains tax. There is a common misconception that trading profits will fall into the category of income tax which means your gains will be taxed at 20 per cent, which is simply not true unless you happen to be a professional trader.

To achieve professional status you would need to be trading very high amounts, which is just not feasible for the majority of people investing in crypto. If you do happen to be trading in high volumes or are a miner of digital assets, this activity will be taxed as income rather than capital gains.

Tracking crypto gains for tax purposes

With the number of transactions made by even casual traders the process of tracking gains for tax purposes can be quite complex. As coins are bought and sold or shifted to other digital assets each gain will be liable for tax. Gains are the difference between the price that the asset was purchased for and the price at disposal. Fortunately, many of the major cryptocurrency exchanges will track transactions for you and calculate your tax liability.

You will need to make sure that you are capturing any other crypto assets from other exchanges or held in additional wallets that may not be tracked digitally. There are some software programs available that can be used to capture all trade and make the process of tax calculation much easier. But for most traders and assets all the usual capital gains tax rules apply.

Offsetting crypto gains

The standard allowance of around £12k per year can be used to protect some gains, and losses can be offset in various ways. For example, if a crypto asset has been purchased and then loses value to the point of worthlessness, it can be added to the HMRC’s negligible value list to negate the need for tax payment.

Timing can be essential when it comes to making tax payments on cryptocurrency gains. If the profits have disappeared by the time the tax bill is due you could be paying more than you really need to. This can happen due to the fact there are often long periods between making gains and a tax bill being due.

Asset value may have dropped during this time meaning that you are left with a bill and no method to pay. Even if the gains have long since vanished the tax bill will still need to be paid. Smart investors will make periodic withdrawals of assets to ensure they have the adequate means to cover any tax obligation that is required.

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