Cryptocurrency Tax Obligations: Q4 Financial Year Awareness

Research published early in this financial year by the Financial Conduct Authority showed that approximately 2.3 million people in the UK own cryptocurrency. As the final quarter of the financial year is now upon us, those who do possess cryptocurrency need to be aware of the tax implications of such ownership.

Cryptocurrency ownership brings with it obligations in terms of paying tax – obligations that can carry severe penalties if they are not met. Profits accrued through trading in cryptocurrency are as taxable as any gains that are made through more traditional or tangible assets. 

The end of the previous tax year saw HM Revenue and Customs (HMRC)  produce its own internal manual on the tax treatment of cryptocurrency. Any selling, exchanging or spending of cryptocurrency will be taxed as a capital gain by HMRC – or the tax authority in whichever country you are based – if a profit has been made. To give an example, if you buy Ethereum coin for £1500 and the value goes up to £2000, then tax will need to be paid on the £500 profit; even if it is then used to buy £500-worth of another coin. 

Such activity is unlikely to escape the notice of the tax authorities. HMRC works in conjunction with the larger cryptocurrency exchanges and expects them to give it information about customers. As a result, HMRC can target crypto investors and send them reminders of their tax obligations. 

It should be emphasised that even if someone who possesses cryptocurrency loses their private key, they are still liable for tax on those assets. The fact that those assets cannot be accessed is not a valid reason not to pay tax on them, as this is not considered a loss for tax purposes.  What also needs to be considered is that cryptocurrency will be treated as property for the purposes of inheritance tax. This could become an increasingly common feature of future inheritance tax planning.

Although crypto is still in its relative infancy, HMRC is certainly alert to such assets being taxable. Precisely how they manage that task will be seen over time. Its approach to cryptocurrency is likely to evolve over the years, and it would no surprise if it started by concentrating on larger crypto investors before working its way down to those holding more modest amounts.

As with other assets, anyone who makes gains via cryptocurrency can use the existing system of HMRC allowances to minimise the tax impact. But, just like with other assets, anyone failing to declare such gains could end up facing a much costlier outcome further down the line.