Now the general election has come and gone, people will be wondering what will happen to our taxes. Of course, politicians can make promises before an election, but, as we all know, they don’t always keep them in office and sometimes events prompt them to decide they need extra revenue.
This was certainly true in the last parliament. With the cost of furlough, business support and other schemes during the pandemic, plus the help with fuel bills after the war in Ukraine sent energy costs spiralling, meant the public finances were squeezed and taxes rose to their highest level in 70 years during the 2022-23 financial year.
All that may raise a question; considering that taxes are charged on fiat money earned, inherited or (in the case of VAT and duties) spent, does that mean that governments will miss out on tax revenues when goods and services are paid for in crypto? Or does the world of cryptocurrency exist outside the tax system?
Why Crypto Is Taxed
The latter might sound like a dream to some people, a kind of cyber-Monaco only without the yachts and grand prix. But it doesn’t take much of a stretch of the imagination to see where such a situation would quickly become problematic for governments, which have things like schools and hospitals to pay for.
As you might imagine, such a situation could never be allowed to arise for precisely these reasons. To let this happen would make crypto a huge tax dodge. But what is the situation for crypto transactions – and how can you make sure you don’t get into trouble with HMRC?
Crypto Tax For Individuals
Firstly, it is important to understand how crypto assets are treated under UK tax law. The current position is that Britain’s financial institutions do not treat cryptocurrency as money or legal currency. Instead, they are categorised in the same way as shares and taxed the same way.
This means there are two kinds of tax you can pay. If you convert your investment into an income you draw in fiat currency, it will be subject to income tax.
If you make a capital gain then capital gains tax (CGT) will apply. As ever, the top tip is if you are in doubt, seek advice from HMRC and/or your accountant on matters such as how much you can earn before becoming liable for CGT.
Crypto Tax For Business
Of course, this type of taxation is specific to individuals. However, as many firms are now geared up to accept crypto payments for business transactions instead of fiat currency, the question should also be applied to companies. If you run a business and accept crypto, what happens then?
The first thing to note is that businesses are covered by a range of tax provisions regarding crypto-based transactions, whether mining, buying, or selling cryptocurrency, providing goods and services in exchange for crypto, or exchanging crypto for assets (either crypto or other items).
In some cases, these will be subject to income tax or CGT in much the same way individuals can be liable. VAT will also apply for purchases (for instance if someone buys something subject to VAT using crypto), while corporation tax, based on company profits, will once again be charged based on the equivalent fiat currency figure.
For example, if an item costs £100 and 20 per cent of that is VAT, should a cryptocurrency payment be made instead of pounds sterling, there will still be a VAT charge to the equivalent of £20.
Other taxes that may apply include national insurance (if crypto is paid in lieu of salary, with the affected employees also having to pay income tax) and stamp taxes for property transactions.
At the same time, HMRC may also treat losses from crypto transactions as a tax liability that can lower your overall capital gains tax bill.
How To Legally Reduce Your Crypto Tax Bill
Of course, as with any taxes, there are ways of reducing your bill with crypto. These include making negligible value claims on any defunct or collapsed crypto you may have acquired, cutting your CGT through making a pension contribution, investing in an enterprise investment scheme, or transferring your assets to your spouse.
In each and every case, the basic principle is that the figure that should be paid in tax is the same as it would had a transaction been made in fiat currency so that companies and individuals cannot use crypto as a means of dodging taxes and also so that the Exchequer is not short-changed.
This is the law as things stand. Whether this will change following a change of government remains to be seen. So far, however, there is no indication of this.