A guide to UK tax on cryptocurrency investments - Bure Valley ...

A guide to UK tax on
cryptocurrency investments
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World governments can have a conflicted relationship
with cryptocurrency. On the one hand, the likes of Bitcoin
represent huge market capitalisation ($600bn in 2021) which
could raise large revenues if taxed.

However, doing so could lend legitimacy to a form of
currency which, by its nature, is highly unregulated and
outside of government control.

India, for instance, in recent months has proposed a
cryptocurrency ban - paving the way for an “official”
digital currency in the near future, which it would be able
to manage.

In the UK, the financial regulatory infrastructure has still not fully adapted to
the rise of crypto. As such, the tax regime is still focused more on “traditional”
investments - e.g. dividend taxes on shareholders, and capital gains on stocks/
bonds sold at a profit.

In this guide, our investment team here at Bure Valley Group offers an
overview of how UK taxes relate to crypto investments in 2021. We also
reflect on where the tax regime may go in the future.

Find out more about our EIS and other investment opportunities by visiting
our portfolio page here.

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Ethereum & Bitcoin
There are over 8,000 cryptocurrencies in existence in 2021. Yet Bitcoin
and Ethereum are still the top two contenders for investor attention.

Both use blockchain as their technological basis, providing transparent online
ledgers which provide a publicly-available, tamper-proof ledger. Like Bitcoin,
each Ethereum transaction is confirmed when all nodes in the network agree
that it occured. These verifiers are also known as “miners”, which is another
area where Ethereum investors can make money.

This is where ETH potentially stands at an advantage to Bitcoin. Whereas
it still takes about 10 minutes to mine a single Bitcoin blockchain, it takes
only 12 seconds to mine an Ethereum blockchain.

By solving more hash functions (i.e. mathematical puzzles) which confirm
transactions, therefore, Ethereum miners can potentially do so faster –
provided they have the necessary equipment.

The problem of valuation
If you look at the UK government’s website, it states that cryptocurrency
investments must be converted into GBP and marked on a Self
Assessment Tax Return by the relevant deadline (e.g. 31st January).

This is where things get difficult. Suppose you hold X number of Ethereum,
which you sell at 100% profit within a crypto exchange. You then trade it for
Y amount of Dogecoin that eventually loses 50% of its value. At which point,
you convert your Dogecoin to GBP.

This is the point where the majority of taxes on crypto assets are likely to
occur - i.e. at the point of disposal into fiat currency (e.g. GBP). As such,
capital gains tax (CGT) will plausibly apply, which is set at 10% for basic rate
taxpayers and 20% for those on the higher and additional rates.

To give a simple example, imagine you committed £2,000 into a
cryptocurrency and later sell your holdings for £4,000.

Assuming you are on the basic rate and have already used your CGT
allowance, this would likely attract £400 in CGT tax - leaving £1,600 in profit.

Mining & taxation
Given this situation, it is little surprise that many investors are keen to hold
onto cryptocurrency investments and continue trading them indefinitely
within crypto exchanges - avoiding changing them into fiat currency.

Yet another common way to make money from cryptocurrency is through
“mining” - i.e. using your computer power to facilitate crypto transactions,
which results in being paid in the particular cryptocurrency. Similar to the
California gold prospectors in 1849, mining cryptocurrency can lead to no
reward or to huge wins. Fortunately, in 2021 there are ways to engage in crypto
mining which do not require investing large sums in computer hardware.

NexGen Cloud Computing, for instance, is an innovative business offering a
platform which allows investors to make use of underutilised hardware around
the world – an approach known as the “Airbnb of cloud computing”.
You will need to weigh carefully whether mining Bitcoin could be more
profitable compared to simply buying it and selling later at a gain.

However, GPU mining for Ethereum is more efficient than mining with Bitcoin
with an ASIC machine. Many miners, when paid, like to immediately convert
their crypto into fiat currency - creating a monthly income (e.g. in GBP).

In which case, Income Tax and National Insurance contributions are likely to
need to be paid. In certain (rare) situations, a miner may even be running a
kind of sole trading business in this manner - meaning that they are regarded as
producing “taxable trading profits”. Here, HMRC may apply Income Tax rules
as priority over CGT rules.

Not too long ago, it was possible to mine and compete for blocks using a
standard PC in your home. However, this is no longer so. Bitcoin, for instance,
tries to produce one block every 10 minutes.

Since more computers are now solving these hash problems, however, the
difficulty has risen sharply that your PC will be the first to solve it and receive
a prize in cryptocurrency. As such, to compete in 2021 as a crypto miner you
need powerful computer equipment like a GPU (graphics processing unit).

Tax mitigation strategies
A good first step would be to seek professional financial advice about how
to best manage your own crypto assets, from a tax perspective.

However, there are some ideas we can mention here which you may wish to
discuss with him/her.

First of all, consider using your ISA (individual savings account) along with
your CGT allowance to avoid unnecessary taxes on the disposal of your crypto
assets. Unfortunately, in 2020-21 there is still no ISA allowing you to invest
directly in the likes of Bitcoin, as opposed to equities and bonds - which can
generate capital gains, interest and dividends without getting taxed.

Yet one idea would be to “spread out” your disposal of crypto assets
across different tax years.

This is because, in 2020-21, you can generate up to £12,300 in tax-free capital
gains each financial year.

This does not include any gains made within ISAs.

So, one option might be to try and keep your “mainstream” investments
within an ISA wrapper (e.g. stocks and bonds), whilst gradually selling crypto
investments outside of this structure.

Secondly, consider “offsetting” losses from specific cryptocurrency investments
against your overall gains. However, be careful to report the loss to HMRC first
- e.g. by letter, or on the Tax Return.

You may also be able to claim losses for defunct coins and mitigate unnecessary
CGT by filing a negligible value claim.

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Conclusion & invitation
Whatever you do, be careful not to ignore UK taxes on
cryptocurrency. Britain has one of the most active tax regimes
cracking down on avoiders, and exchanges such as Coinbase are now
working with HMRC to hand over data on UK customers.

Professional Guidance
Whether you are a professional investor with years of experience, a curious spectator looking to know
more, or someone who is preparing to take the plunge in to an extremely exciting space in the UK,
then it is always advised that regardless of experience, you seek expertise.

Bure Valley group has been supporting the growth and development
of businesses and investors for many years, covering traditional and
emerging sectors.

Interested in finding out more about the exciting startup projects
we have on offer to investors here at Bure Valley Group?

Get in touch today to start a conversation with our team and discuss
some of the great investment memorandums we have available here.

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