Cryptocurrency and Tax: A beginner’s guide

You may have heard of cryptocurrencies like Bitcoin and Ethereum, or seen PayPal supporting ‘crypto’ payments, and thought they sound like another language. As cryptocurrency creeps into the mainstream, we’ve pulled together a beginner’s guide to help you understand cryptocurrency and what you need to know from a tax perspective.

We asked Champion Accountants’ tax advisory consultant, Martin Frain, for his insight…

Cryptocurrency: what is it?

Cryptocurrency is a digital asset used as a medium of exchange. They’re operated on a decentralised system, not linked to any one currency or bank as a traditional currency might be. That decentralised system is the ‘blockchain’ technology – almost like a ledger that records all transactions made that offers security.

As there are a finite number of ‘tokens’ for each cryptocurrency – such as Bitcoin, Ethereum, XRP, for example – the number of investments made drives up the value (or down). As has been shown in recent months, the value of cryptocurrencies – even the most popular ones like Bitcoin – can be volatile.

Cryptocurrency can be used as a means of purchase but, usually, they’re traded as digital assets with the aim of gaining a return. And herein lie the tax implications.

Is cryptocurrency taxable?

The simple answer is yes. It is a relatively new asset so the rules around tax are evolving, but, as with any source of income, gains from cryptocurrency may need to be declared.

If, like many beginners, you buy cryptocurrency as a personal investment and then ‘dispose’ of it – by either selling, exchanging or spending – you need to establish if you have created a disposal that needs to be declared to HMRC.

The Annual Exempt Amount (AEA) is currently £12,300 and you would pay Capital Gains Tax on profits over this threshold, however, if your disposal proceeds are more than four times the AEA, you would still need to declare the disposal even if this is at a loss.

If, however, you begin to trade in cryptocurrency e.g. making frequent transactions, and if the activity is seen to be ‘the nature of a trade’, earnings will be subject to Income Tax. Whether you’re employed or self-employed, your ‘crypto income’ would be added to your ‘regular income’ and the total will be subject to tax at the relevant bracket. Be aware that crypto income may push you into a higher tax bracket.

What else do I need to know?

As you would with any other type of income, it’s important that you keep accurate records for tax purposes. Consider keeping a note of types of tokens, dates bought/disposed of, value of tokens remaining, relevant bank statements etc. as this is especially important where you are making any disposal within 30 days of acquisition as the calculation will be different than you may have experienced before.

From there, it’s crucial to seek expert financial advice. While the waters are a little murky, an accountant and advisor well versed in crypto will be able to give you the latest information and advice for your individual circumstances. To find out more, contact Martin Frain on 0161 703 2500 or