Cryptoasset (also known as cryptocurrency), as defined by HMRC, are cryptographically secured digital representations of value or contractual rights that can be transferred, stored, or traded electronically. There are different types of cryptoassets which work in different ways but the main types are Exchange tokens, Utility tokens, Security tokens and Stablecoins. The tax treatment of all types of tokens is dependent on the nature and use of the token.

Cryptoasset transactions usually occur on a public blockchain so can be viewed digitally and checked using records obtained from a wallet. These are obtained, administered, exchanged, used and linked to fiat currency electronically or digitally. Therefore, to request electronic records with full details of transactions and any supporting valuation records for the acquisition and disposal tax points is a reasonable approach.

If cryptoassets are to be disposed of and incur gains which are over the annual exempt amount, which is £12,300 for the tax year 2020 to 2021, there is a need to pay Capital Gains Tax (CGT). Disposal may include selling, exchanging from one cryptocurrency to another or to use it to buy goods or services. The annual exempt allowance of £12,300 covers any disposal of other assets such as shares or properties as well. A capital gain occurs when one sells or trades cryptocurrencies and is calculated by subtracting the price when the crypto is bought for cost-basis from the price that it has been sold. If the asset was free, the need to use the market value instead for the calculation of gain.

Moreover, there are also allowable costs, including a proportion of the pooled cost of the tokens, that could be deducted on the computation of the Capital Gains. Capital losses could also be used to reduce the gain but this needs to be reported to HMRC first.

Once total taxable gains have been calculated, the rate pay for capital gains tax depends on the size of the gain, the taxable income and whether the gain is from residential property or other assets. If one is a higher or additional rate taxpayer, it should pay 28% on your gains from residential property and 20% on your gains from other chargeable assets. However if one is a basic rate taxpayer, taxable income must be computed (Income minus Personal Allowance and any other Income tax Reliefs one is entitled to) and follows the computation for the taxable gains. The tax free allowance should be deducted from the total taxable gains and the net will be added to the taxable income. If the amount is within the basic Income Tax band, one shall pay 10% of the gains (or 18% on residential property). Otherwise, one should pay 20% (or 28% on residential property) on any amount above the basic tax rate.

If one needs to report and pay Capital Gains Tax, one can either complete a Self Assessment tax return at the end of the tax year or use the Capital Gains Tax real time service to report it straight away. If further clarifications are required, Cheylesmore Accountants would be glad to be of help. You may visit https://www.cheylesmore.com or send an email at info@cheylesmore.com.