Cryptocurrency is the buzzword of 2021 – but what is it, and how does it affect you?
A cryptocurrency is a digital or virtual currency that uses cryptography as a security feature, making it almost impossible to duplicate or counterfeit. Cryptocurrency is growing in popularity as a way for businesses to sell goods and make profits; PayPal is allowing its US customers to buy, hold and sell cryptocurrencies through their accounts and Facebook is set to launch its own digital currency later this year.
But while it might feel everyone is suddenly talking crypto, it’s actually been in circulation for much longer – around a decade. Today though, as we become more acutely aware of financial and banking fraud schemes, providers are looking to launch new cryptocurrencies which they say are much safer for people to use.
Currently, there are between 5,000 and 7,000 cryptocurrencies in existence depending on whether you include failed ones or not. At Champion, we’re starting to see an increase in the number of enquiries from both existing and new clients asking about tax liabilities on profits made from cryptocurrency transactions, as there are potential tax consequences of cryptocurrency gains.
As a basic rule of thumb for a typical buy/sell transaction, the increase in value between the purchase and sale would be chargeable to Capital Gains Tax (CGT). Providing your total chargeable gains for the year are less than the annual exemption amount (currently £12,300), there would be no tax to pay. But anything above this level would start to incur CGT at 10 per cent for basic rate taxpayers and 20 per cent for a higher rate.
These profits, however, could instead fall into the scope of Income Tax if you’re ‘trading’ in cryptocurrency.
Signs of trading activity are large volumes of transactions, depending on the income generated, and an interval between purchase and sale. If you’re deemed to be trading in cryptocurrency, then your tax rates will jump to 20 per cent, then 40 per cent or even 45 per cent, as well as being subject to National Insurance. And given the potential for quick and substantial returns as seen with the speedy surge in the value of Bitcoin, your tax liability could rise significantly and quickly.
Understanding when you change from a simple chargeable gain to a trading investor can be difficult, so it’s important to get advice before you invest in cryptocurrency so you can accurately plan for future tax liabilities.
To discuss cryptocurrency investing in more detail, contact Martin Frain at firstname.lastname@example.org or call 0161 703 2500.