Cryptoassets or cryptocurrencies, as they are often known, are becoming an increasingly popular way for people to invest and control their funds. As with any financial venture, investors need to be aware of any tax implications, so it makes sense to have crypto taxes explained.

Although thousands of them are available, Bitcoin, Ripple, Ethereum, and Litecoin are the most commonly known types of cryptocurrencies.

The word ‘crypto’ means to be hidden, chosen because of the protected technology that stores details of ownership and transactions. The term ‘currency’ was selected to represent the original aim of crypto operating as electronic cash.

Blockchains store cryptocurrencies. They are a particular type of database that provides an irreversible record of all crypto transactions.

Central banks in the UK now use the term cryptoassets as this more clearly defines the primary way people use cryptocurrencies. Since it is almost impossible to spend crypto in the same way as cash in the UK, it is more commonly bought as an investment in the hope the value will grow.

The Bank of England has expressed concern over the lack of controls as it is unregulated. Despite this, cryptoassets have increased in popularity, and demand has often allowed their value to grow, meaning more people will need to consider paying tax.

Here are some of the cryptocurrencies that saw the highest growth in 2021.

The attraction of cryptocurrencies is the promise of earning significant rewards. Despite the lack of regulations, there will be tax implications if you make any gains when you sell, but remember that profit is not guaranteed.

The lowest risk investment is to hold your money in a bank account. You will not earn much interest, but you are also unlikely to lose any money. Banks will also protect your assets against fraud.

Investing in the stock market comes with greater risk as your investment can go up or down. However, according to HSBC, investing in shares is a balancing act between reward and risk.

Investing in cryptoassets is far more volatile. Only this month, Forbes reported that Solana, a blockchain platform, had dropped drastically following reports of a $325 million hack.

More people now see cryptoassets as a legitimate way of investing, so they must understand how taxation will impact them.

El Salvador was the first country to make cryptocurrencies legal tender.

In the UK, HMRC has set out the regulations for paying tax on cryptoassets in their Cryptoassets Manual.

As with most investments, you will pay tax on the profit you make when you realise that gain. Consequently, if you buy cryptocurrency, you will pay capital gains tax on any profits you make when you dispose of them.

HMRC refer to all types of crypto as ‘tokens’, and they use the word disposal rather than sell as it covers:

•         Selling tokens for money
•         Exchanging for another token
•         Using tokens to pay for services or goods
•         Giving tokens away

When you dispose of any cryptocurrency, you will pay capital gains tax on any gains. The tax free-allowance for capital gains tax is £12,300. If your total income is more than this figure, you will have to pay tax on any capital gains.

• Higher and additional rate taxpayers pay 20%
• Basic rate taxpayers pay 10% (depending on the size of the gain)

You pay capital gains tax on any gain you make when you dispose of cryptoassets. Your gain is the difference between the price you paid and their value when you sold them. 

However, you can offset some crypto-specific allowable costs against the gain.

• Any transaction fees incurred before the transaction is added to a blockchain.
• Cost of advertising for buyers or sellers.
• Cost of a transaction contract.
• Any valuation costs

While HMRC claims to have tried to make these calculations more straightforward, there are some complexities that you need to check carefully against their manual.

When calculating your gains for capital gains tax on cryptoassets, you can group each type in a pool.

This practice is similar to grouping together regular investments in a single company.

However, the rules stop you from pooling your gains from crypto if you buy tokens on the same day or within 30 days that you sell tokens of the same type.

Like gains on any investment in the UK, you report them on a Self Assessment Tax Return for tax purposes. There is also a real-time service for registering capital gains tax.

Keeping accurate records of your crypto dealings is critical to make your life easier and ensure you comply with the rules.

HMRC suggests you keep details of the type of tokens, disposal dates, token values and numbers of disposed of tokens. It would also help to keep bank statements, wallet addresses, records of pooled costs, and totals of remaining crypto.

Completing a tax return can be tricky, so if you can’t get the information you need from HMRC, you should consult a tax expert to advise you.

We have looked at how you deal with paying tax on crypto for individuals, but what if you are trading crypto as part of your business?

There are several ways in which businesses might be trading in cryptoassets.

• Buying or selling tokens
• Exchanging tokens
• Mining to generate new coins
• Receipt of tokens as payment for goods or services

Any business which operates or makes transactions with cryptoassets must report the tax implications either on a Self Assessment Form or in a company tax return.

Various taxes could be applicable for businesses dealing with cryptoassets.

• Capital gains tax
• Corporation tax
• Corporation tax on chargeable gains (CTCG)
• Income tax
• National Insurance
• Stamp duty
• VAT

Not all of these will be applicable for every business, but it is crucial to have thorough records and use an accountant to prepare your accounts accurately.