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If you’re thinking of investing in cryptocurrency then you might be asking yourself, ‘are bitcoins tax-free?’
The value of these types of cryptoassets has continued to grow significantly, and as a result, more and more people are looking to buy and sell them. If you’re one of the lucky few who invested in Bitcoin early, then you might think that any profits you make from trading them are tax-free.
Unfortunately, you’re wrong!
Many people think of cryptocurrency profits as being similar to gambling or a lottery type win; which would make them not taxable in the eyes of HMRC. What many people do not realise is that this isn’t true. Like any form of asset, there are various different tax implications attached to selling/exchanging Bitcoin.
Bitcoin is a form of cryptocurrency. It’s a token that’s completely virtual, but like pound sterling, it can be used as a payment for goods and services with some retailers.
HMRC have made it very clear that bitcoins and other types of cryptoassets are not tax-free, and are subject to tax like any other asset. However, although they are considered to be a form of digital currency, HMRC doesn’t recognise Bitcoin as “money”. Instead, it’s considered a type of personal investment, like property or shares.
You’ll have to pay tax on your bitcoins if:
Generally, the answer is yes.
If you’re a UK tax resident and you make more than the Capital Gains Tax allowance, then you’ll need to inform HMRC. You do this by paying CGT through a self-assessment tax return.
It’s important to disclose all information about your Bitcoin trading to HMRC, as if you don’t, it could result in a hefty fine! In the past few years there has been an increasing number of HMRC enquiries focussing on those who buy and sell crypto assets and who have not paid the correct tax.
You can work out how much Capital Gains Tax you need to pay using our CGT tax calculator below!
First £12,300 are tax-free.
£1,000 taxed at 10%: £100
£6,700 taxed at 20%: £1,340
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Your total capital gains tax (CGT) owed depends on two main components:
Your overall earnings determine how much of your capital gains are taxed at 10% or 20%.
Our capital gains tax rates guide explains this in more detail.
In your case where capital gains from shares were £20,000 and your total annual earnings were £69,000:
You pay no CGT on the first £12,300 that you make
You pay £100 at 10% tax rate for the next £1,000 of your capital gains
You pay £1,340 at 20% tax rate on the remaining £6,700 of your capital gains
If you run a business that’s carrying out various ‘activities’ with Bitcoin and/or other types of cryptoassets, then your company will have to pay tax on them. HMRC state that these activities include:
The type of tax that your company will have to pay depends on who is involved in the business and the types of activities that it carries out. It’s likely that your company will be liable to pay one of the following types of tax:
As for the actual amount of tax your company will pay, this depends on various factors, such as business income, expenditure, profits and gains. It’s important that you declare this to HMRC on a company tax return, or a Self Assessment tax return if you’re a sole trader.