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A Guide to Tax on Cryptocurrency in the UK

lpb@louisbarnett.org (Louis Barnett) — Wed, 30 Aug 2023 11:54:22 GMT

Do you need advice on tax on cryptocurrency? It’s best to be aware of your tax liabilities sooner rather than later, because the penalties for not doing so can add up quickly.

With cryptocurrency transactions, tax rules can get slightly complicated, and you could incur several different liabilities, like income and corporation tax, stamp duties and – depending on transaction types – VAT. Your classification as a business or individual will define how you pay tax, and how much.

How it works: Are you a business or an individual?

HMRC may treat you as a business rather than an individual if your activity level is comparable to a company’s. How does HMRC determine whether you qualify as a crypto trader? This will depend on factors including:

The number and frequency of transactions
Your organisation
Your risk level
The time you devote to the activity
The length of time you hold instruments - whether they’re bought and sold within minutes or retained for longer

Mining cryptocurrency as a business

If mining is classified as a business based on those criteria, any resulting income will be added to your trading profits and be subject to income tax. Fees or rewards for any staking activity will also get added, although reasonable expenses will be deductible.

Remember, while disposing of mined cryptocurrency, any gain in value from the time of acquisition will be added to trading profits. You’ll also have to pay National Insurance contributions for such a transaction.

Tax on Staking or Lending as a Business

This is a grey area because there’s no reporting guidance from HMRC. The best approach is to declare this in the same way as you would mining. If you received payment in a cryptocurrency, you’d need to calculate the fair market value of the coins based on when you received them.

What is a disposal for capital gains purposes?

If you are classed as an individual and hold cryptocurrency as an investment, you’ll be liable to pay capital gains tax upon disposal. “Disposal” has been defined by HMRC as:

Selling crypto assets for money
Exchanging crypto assets for a different type of crypto asset
Using crypto assets to pay for goods or services
Giving away crypto assets to another person

Naturally, the amount of capital gains will be the difference between the sales proceeds from the disposal and the crypto asset’s acquisition cost – the sale price minus the buying price.

How much tax do you have to pay on cryptocurrency?

This depends on your income tax bracket:

If you’re a higher or additional rate taxpayer, your capital gains tax rate will be 20%
If you’re a basic rate taxpayer, your rate will depend on your taxable income and the size of the gain (after any allowances are deducted)

Be aware of same-day and bed-and-breakfasting rules

The Same-day and 30-day rules that apply to shares also come into play with cryptocurrency. That’s to prevent wash sales, which basically means selling crypto and repurchasing it in an attempt to reduce your tax bill.

Same-day rule : Let’s say you sell a cryptocurrency and buy another of the same kind on the same day. In that case, the cost basis for your sale will be the acquisition cost of the crypto you purchased that day. Remember that will still be the case, even if the acquisition happens before the sale, as long as both transactions happen on the same day,
30-day rule : This is similar, but the timeline changes and any crypto you acquire within 30 days of a sale will be used to calculate its cost basis.

The rules are there to ensure you don’t sell your holdings at the end of the tax year, just to create losses that you can write off before repurchasing your holdings immediately.

Trading one cryptocurrency for another

HMRC makes it clear this constitutes a taxable event. That means you’re basically disposing of one asset that’s subject to capital gains tax and then acquiring another. The market value of the crypto you receive is considered as the sale price for that transaction. If this crypto cannot be valued for some reason, you can still use the market value of the crypto you sold.

Paying for goods or services with cryptocurrency

From an HMRC perspective, using crypto to pay for goods or services is the same as selling crypto, so it’s subject to capital gains tax. Remember, though, the market value of the crypto you use to pay for something will be counted as the sales proceeds.

Moving crypto between your own wallets or accounts

While there’s no tax liability created when you move crypto between your own wallets, it’s important to remember you still need to keep track of such movements. If you don’t, HMRC might assume they’re disposals and tax them.

Tax on ICOs or IEOs

Initial Coin Offerings (ICOs) or Initial Exchange Offerings (IEOs) refer to the practice of purchasing tokens or coins in a yet-to-be-released cryptocurrency or company. In such a case, investors pay for the new token using existing cryptocurrencies like Bitcoin or Ethereum.

So it works like a crypto-to-crypto exchange. You’ll have to pay capital gains tax on the crypto you exchange for the ICO token. The “sale proceeds” here will be the market value of the existing crypto – not the new token – on the date that the exchange took place. In addition to that, this same market value will also serve as the cost basis for the new token you receive from the ICO, which you can use to calculate pooled costs.

How to minimise your tax burden

You can still protect yourself from unnecessary tax liabilities if you pay close attention to the rules around tax on cryptocurrency in the UK. This is a guide on what you can and can’t claim.

1/ Make use of your annual capital gains tax allowance

Don’t forget about your allowance. Capital gains tax has to be paid only if you made more than £12,300 (in 2020-21) in profits. Work out your capital gains, and if the result is below the limit, you don’t need to pay any CGT.

2/ Offset your crypto losses

If you sell cryptocurrency for less than the cost basis, you create a capital loss. That loss can be offset against any overall gains, but you’ll need to report it to HMRC first. Losses can be notified by letter or on your tax return. Capital losses can be claimed any time within four years, starting from the end of the tax year in which they occurred.

If the disposal of the crypto is to a connected person, the actual sales price is not considered the same as the sales proceeds, and the market value of the crypto on the date of the transaction is used instead.

3/ Claiming losses for defunct coins

When crypto-assets are subject to wild fluctuation, it’s not unusual for someone to own currency that’s become worthless or of negligible value. In such a case, the owner can file a negligible value claim. In doing so, the crypto assets are treated the same way as when they’ve been disposed of, then re-acquired for the amount stated in the claim. That allows you to write off a major loss for an asset that is now illiquid.

4/ Leveraging deductible costs

When calculating a gain or loss, there are certain allowable costs you can deduct from the sales proceeds:

The consideration (in GBP) originally paid to acquire the crypto asset
The transaction fees paid before the transaction was added to a Blockchain
Any exchange fees related to trades
Professional costs for drawing up the contract for acquisition and disposal
Costs related to advertising for a purchaser or vendor
Costs of making an apportionment or valuation to calculate gains or losses

The following costs are not allowable for capital gains tax purposes:

Any costs that have already been deducted against profits for income tax
The costs of mining activities, such as electricity and equipment

Final thoughts

It’s well worth noting that in a case where mining is a business activity, the crypto assets will form part of trading stock. If the assets are transferred out of trading stock, the business will be treated as if they bought the crypto at the trading accounts’ value. That value can then be used as an allowable cost upon disposal.

If you are cryptocurrency trading as a business or as an individual and need advice, get in touch with us.

A Beginner’s Guide to Crypto

lpb@louisbarnett.org (Louis Barnett) — Wed, 30 Aug 2023 11:46:50 GMT

We’ve all heard of cryptocurrency, but how many of us actually understand what it is and how it works? This guide will tell you what you need to know – and help you decide whether it’s the right investment for you.

What is Cryptocurrency?

Cryptocurrency is digital money that is designed to be used over the internet. The first cryptocurrency was Bitcoin, which launched in 2008 and remains by far the biggest, most influential, and best-known.

In the decade since, Bitcoin and other cryptocurrencies like Ethereum have grown as digital alternatives to currency issued by governments. There are now more than 1,500 cryptocurrencies you can invest in or trade.

A glossary of key Crypto terms

Cryptocurrency

A relatively new type of virtual money that is nearly impossible to counterfeit or double-spend. There are no physical coins or notes, it’s a digital asset stored in a hot or cold wallet online. A hot wallet is like your everyday purse, which should hold only a small amount of funds that you use for regular transactions. A cold wallet is like your savings account, which holds the majority of your funds – but transfers cannot happen so quickly. A cold wallet is a better option for people who aren’t regular crypto traders.

Decentralisation

This means there's no central authority, like a bank or government, controlling how things work. Cryptocurrency is circulated through a process of volunteers from across the world using their computers.

Distributed/Public ledger

A database that is shared worldwide and allows the network of volunteers to secure and validate transactions made with cryptocurrency.

Centralised ledger

The opposite to a distributed ledger. This is what most companies use. It’s more vulnerable to cyber security threats, because it exists as a single point.

Blockchain

The blockchain is a public ledger that records all transactions made on the network. It's distributed over thousands of computers around the world to ensure that no one person can control it or make fraudulent transactions. Every computer on the network has its own copy of this ledger, so there's no single point of failure where hackers could target and corrupt all copies at once. It was originally created to run Bitcoin, but is now applied to many other areas of society, including government record-keeping, banking and finance, healthcare and supply chain management.

NFTs

This stands for Non-Fungible Tokens. “Non-fungible” describes something unique that can’t be replaced with something else. NFTs are a digital asset like cryptocurrency but they represent real-world objects like art, music, video game items or videos. They are bought and sold using the same technique and software as cryptos. When you buy an NFT you are buying its ownership, which can’t be copied, though the artist can still keep the copyright and reproduction rights. Put it this way, anyone could buy a Van Gogh print – but only one person owns the original.

How else does crypto differ from regular currency?

The biggest difference is that crypto is decentralised. However, there are several other key differences worth discussing.

If you own crypto, you don’t possess anything tangible. What you own is a key that allows you to access your account to withdraw or move funds from one person to another without a trusted third party.

This “key” takes the form of a string of random letters, which should be treated similarly to a bank account number. Nobody should have access to it except you, or they could wipe out your account. You must keep it safe because you can’t reset it like a password. Most crypto platforms where you purchase your coins will never ask for your key.

You also have a “public key” or address, which is actually your home address or the place where your funds will be sent that you then share with anybody who wants to send you crypto coins. However, people don’t send you funds through the post. You can have a link generated that uses this address where people can transfer you coins online. This public key needs less protection than your private one, but you should still keep a good record of it.

The global financial system has been based on a set of laws and best practices for centuries. Crypto, on the other hand, is a largely unregulated market, and any rules in place often vary by judgement.

Sending money internationally and across borders is much faster with cryptocurrency. Instead of days, transactions are completed in minutes at a fraction of the cost.

Normal money has an unlimited supply, because more can be printed in times of financial crisis. Cryptocurrency, however, is in limited supply. Once a certain number of virtual coins are in circulation. For Bitcoin, this number is 21 million. This limited supply works to crypto’s advantage, because it theoretically ensures that coins hold their value for years to come. A bit like digital gold.

Transactions are permanent and final. It is nearly impossible to reverse any crypto transactions.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in finance and more uses are expected in future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology. Some shops have begun accepting crypto as payment.

Pros and Cons of Investing in Crypto

Pros:

You can send coins worldwide
Make instant, secure transactions
No or low fees
Can be easily converted into cash without affecting its market price
Potentially high returns on investments

Cons:

Largely unregulated
Few businesses currently accept crypto
It’s a high-risk investment because its value fluctuates a lot quickly
You can’t recover transfers that have been processed

Taxes and Cryptocurrencies

There are no clear-cut rules, because the government has not classified cryptocurrency as a taxable income. However, when you use it to purchase goods or services, your transaction is considered a taxable event.

Cryptocurrency is treated as both property (like stocks) and currency (like foreign exchanges). This means any earnings from the sale of cryptocurrency are treated as capital gains.

The tax implications of this can be complicated because many people forget to report cryptocurrency exchanges on their tax forms, or to keep accurate records of their earnings from crypto.

Crypto doesn’t have to be cryptic

You may now feel sufficiently confident to enter the world of cryptocurrency. However, if you need advice at any time about any aspect of crypto, you are welcome to get in touch with us.

A Guide to Capital Gains Tax on Cryptocurrency in the UK

lpb@louisbarnett.org (Louis Barnett) — Wed, 16 Aug 2023 15:57:49 GMT

Cryptocurrencies have been gaining increasing popularity in recent years, hitting the mainstream, getting everyone talking, and getting many investing. As the new monetary system began gaining traction so quickly, governing bodies have been scrambling to expedite the lawmaking required to manage it effectively.

This new financial frontier is a considerable disruptor to systems as we know them, and it’s common for those getting involved in cryptocurrencies to be unsure of the laws and guidelines they must follow, including how taxation is applied to it.

The way in which cryptocurrency is taxed essentially depends on how you earn it and the amount of profit you are making. Here is a guide to capital gains tax on cryptocurrency in the UK.

Is there a specific UK cryptocurrency tax?

In short, no, there is no specific taxation legislation for crypto in the UK . This is because cryptocurrency itself is recognised as tokens by the HMRC (His Majesty’s Royal Commission) rather than any form of legal tender (money). Instead Crypto is taxed using older UK tax principles that are based on case law and other pieces of legislation. Nevertheless, it isn’t quite as simple as that when it comes to paying tax on it.

How is crypto taxed in the UK?

There are two main categories regarding crypto tax in the UK:

Income Tax : Once you earn over the tax-free threshold of £12,570, any additional income made on cryptocurrencies with be taxed
Capital Gains Tax (CGT) : If you make a profit of more than £12,300 through selling, spending, swapping, or gifting crypto, you will be required to pay CGT on those profits

When do I need to pay crypto tax as Income Tax?

Anyone who earns crypto in the UK must pay both Income Tax and National Insurance (NI) on the amount, just as they do when earning GBP (British Pound Sterling).

The requirement to pay Income Tax on crypto in the UK can result from the following:

Being paid in crypto by your employer: despite this being a form of non-cash payment, HMRC still deems it as income
Crypto mining: any rewards that result from you validating cryptocurrency transactions on a blockchain network are considered miscellaneous income
Crypto staking: any tokens awarded to you through the process of staking in crypto are also classed by HMRC as miscellaneous income
High level trading crypto: most crypto investors and traders will pay Capital Gains tax on trading crypto . Although there are some exceptions, from a UK tax perspective, where there is a Crypto trading business the profits will be taxed as income tax.
Receiving crypto airdrops: when you received airdropped cryptocurrencies instead of GBP in exchange for providing a service, it will be classed by HMRC as miscellaneous income

As mentioned earlier, if you earn over the UK personal allowance of £12,570, you will need to pay tax on any cryptocurrency income you earn (as per the scenarios above). The amount of income tax you will pay on your crypto income will depend on the Fair Market Value (FMV) of the crypto income as of the date and time it was received, and your relevant tax band.

As of 2022-2023, the UK Income Tax bands are as follows:

Band Taxable Income Range Tax Rate

Using this table, for example, if your regular income is £62,000 and you earn £10,000 in cryptocurrency, your total income of £72,000 will still fall into the Higher Rate tier, and you will pay 40% tax on your total combined income over £12,570 (e.g., £72,000 minus £12,570). You can use the HMRC calculator to help estimate how much tax you will be required to pay.

When do I need to pay Capital Gains Tax on crypto in the UK?

In the UK, HMRC classifies crypto as a financial asset and is taxed accordingly. This means that when you either sell, swap, or gift crypto in the UK, it is considered a taxable event, the profits of which are subject to Capital Gains Tax. (CGT).

All UK citizens are entitled to a Capital Gains Tax Allowance, which as of 2022-2023, is £12,300. This means that, so long as your cryptocurrency profits in any one year do not surpass £12,300, you will not be required to pay capital gains taxes or report them as capital profits.

In the cases where your crypto profits do exceed £12,300, you will need to report them as profits in your self assessment tax return or year-end accounts and pay CGT on them accordingly. The manner in which you make crypto profits that will be subject to CGT include:

Selling your crypto in exchange for GBP : if you sell your cryptocurrency for more than it cost to buy it, the profits you make will be subject to CGT
Swapping cryptocurrencies : if you swap one form of crypto for another, any profits made on the swap will be subject to CGT
Using crypto to purchase goods and/or services: when you spend crypto on goods and/or services, any profits made will be subject to CGT
Gifting crypto: if you gift cryptocurrencies to a third party (other than your spouse or civil partner), any profits made between purchasing it and gifting it will be subject to CGT

It’s also important to note that the time it takes for these profits to accrue is irrelevant; whether the profits made took an hour or two years to grow, the same CGT will apply.

How much CGT will I have to pay on my crypto profits?

If your crypto trading profits exceed £12,300 in any one tax year, CGT will apply, and the rate of CGT you will be required to pay will depend on your Income Tax Band.

Before you can ascertain what your capital gains tax bill liabilities will be, you will need to work out your exact crypto profits. To do this:

Calculate your ‘cost basis’ for each of your (CGT-relevant) crypto transactions. To do this, simply add the amount you originally paid for the crypto, plus any additional transaction fees. For example, if you paid £10,000 for 1 Bitcoin (BTC), and the purchase cost you £100 in transaction fees, the cost basis for this crypto asset would be £10,100.
Deduct this cost basis amount from the value of the crypto at the time of disposal; this is how to work out how much the crypto asset was worth at the time it was sold, gifted, spent, or swapped. For example, if your cost basis for the 1 BTC was £10,100 and you subsequently sold it for £13,500, your profit would be £3,400. This amount is what is known as your ‘Capital Gain’ amount.
Check the CGT rates table to see which rate applies to you based on your Income Tax Band. The rate of tax you will need to pay on your Capital Gains will depend on the Income Tax band that applies to you.

Here is the Capital Gains Tax rate table as of 2022-2023:

As an example, let’s say you’re a higher rate taxpayer and you make £25,000 of crypto profit in a tax year, you would deduct the CGT-free allowance of £12,300 from your profit, and then pay 20% CGT on the remaining £12,700.

What if I make a loss on my crypto assets?

When you make a loss on crypto (or any other chargeable asset), you may be able to use those losses to reduce the total amount of taxable gains. Losses can only be claimed within four years from the last day of the tax year in which the loss was incurred.

How to minimise paying Capital Gains and Income Tax on cryptocurrency in the UK

First up, it’s important to note that while the UK’s CGT tax-free allowance is currently £12,300, this amount is scheduled to drop to £6,000 from April 2023 and further down to £3,000 from April 2024. So, be on your toes to make the most of the CGT savings before the tax-free allowance dwindles considerably.

There are a few ways to legitimately minimise the amount of Capital Gains Tax to pay on cryptocurrency in the UK. The following types of crypto transactions are not subject to either Income Tax or Capital Gains Tax in the UK:

Making a crypto donation: in the UK crypto donations are income tax deductible, allowing investors to strategise how much income tax they are liable for. Just make sure the charity is registered and that the donation is not made to an individual connected to you (the donor).
Gifting crypto to your spouse or civil partner : Transferring crypto between spouses is currently exempt from CGT in the UK, making for a handy tax-free gifting loophole. This means that spouses and civil partners can effectively double the CGT allowance available to them (£24,600 as of 2022-2023). This benefit only applies if you live together and are not separated. This can also be of financial benefit in the case that one partner is in a lower CGT band than the other.
Harvesting your losses : capital losses can only be realised when you sell, spend, gift, or trade your crypto, so if you have some unrealised losses taking up room in your portfolio, it might be of benefit tax-wise to sell them at a loss - this is also called ‘tax loss harvesting.’
Investing in a SITR or EIS : you can defer a portion of your cryptocurrency tax bill by investing in either government scheme. Capital gains made on investing in a Social Investment Tax Relief (SITR) or Enterprise Investment Scheme (EIS) are exempt from CGT when held for three or more years.
Investing your crypto into a pension fund : this is possible, although not entirely straightforward, so check with your accountant or financial advisor when considering this option.
Using the UK’s tax breaks on trading : if you earn less than £1,000 in cryptocurrency income in any one year, you do not need to declare it to HMRC (even if your other earnings exceeded the regular income threshold of £12,570.

Does HMRC track crypto?

Yes. HMRC runs a data-sharing program with all UK financial exchanges, including crypto transaction data going all the way back to 2014. Additionally, HMRC holds any KYC (Know Your Customer) information that you have provided during any UK exchanges or wallet sign-ups.

Get expert advice on crypto tax UK

The laws and regulations governing cryptocurrencies and crypto taxes are developing all the time, and in any case, the best way to ensure that you are maximising your financial position is to seek expert financial advice.

Consult with one of our crypto accountants to determine the best course of action for managing and reporting your crypto investments. For capital gains tax purposes or if you need to pay tax on crypto or file crypto taxes, our experts can minimise your tax liability. To book a free consultation, click here .

When Can Trusts be a Good Tax Planning Tool for Crypto Investors?

lpb@louisbarnett.org (Louis Barnett) — Thu, 27 Apr 2023 15:36:23 GMT

Despite a degree of recent global economic turbulence having a somewhat noticeable impact on cryptocurrency markets, investment in cryptocurrencies, blockchain technology and other related digital assets continue to remain popular amongst UK investors. In fact, data shows that between 2018 and 2021, crypto transactions and adoption in the UK increased by as much as 650% , from 1.5 million to 9.8 million active investors.

Just as with traditional investments, most cryptocurrency holders will be looking to protect the wealth earned from accumulated assets to be passed onto future generations or otherwise managed by a chosen estate. Though at present, cryptocurrencies are not taxed in the way traditional assets are and have specific tax considerations and tax reporting requirements.

Whether you’re wondering how to start investing in cryptocurrency or are already in possession of a healthy portfolio, financial advisers recommend that asset holders consider actions like inheritance tax planning trusts sooner rather than later to help protect accumulated wealth from avoidable taxation.

This guide will explain how HMRC views cryptocurrencies in terms of taxable assets, how investors can navigate UK practices to minimise tax liabilities relating to crypto assets, as well as outline the most effective types of trusts and estate planning procedures UK crypto holders should consider for tax purposes.

What is tax planning?

Before outlining the ways in which crypto investors can protect their assets using trusts and other related protections, it’s wise to understand what is meant by the term tax planning. In short, personal tax planning involves analysing a person’s financial assets (in this case cryptocurrencies) to deduce how HMRC is permitted to tax gains and use this to create a plan allowing the holder to pay the lowest possible amount.

When investing in cryptocurrency, tax planning should form an essential aspect of all long-term financial plans, as a reduction in tax liability facilitated through these actions will ultimately contribute to a greater amount of earnings able to be paid into accounts like retirement and inheritance funds.

At present, HMRC does not view crypto assets as comparable to currency or money, meaning that all profits and financial gains gleaned from buying or selling crypto will be considered as taxable. In addition, cryptocurrencies are classed as property by HMRC in terms of inheritance tax, meaning they will form part of any taxable estate and contribute to the £325,000 threshold used to calculate inheritance tax.

Identifying crypto assets

To ensure that all taxable crypto assets are appropriately accounted for and factored into tax implications, investors must clearly outline where their assets are held as well as their financial value. Any assets stored exclusively online in protected wallets can be difficult for financial advisors to locate, though if they are uncovered after death, any retroactive tax applied can affect previous tax planning efforts.

Additionally, UK tax law states that any resident who pays tax in the UK will also be required to pay tax on the disposal of crypto assets, regardless of whether said assets were purchased through an offshore exchange or bank account. In layman's terms, any capital gains taxes applicable to the disposal of crypto assets cannot be legally avoided so long as the holder is considered a tax resident in the UK.

Types of cryptocurrency investment trust

Choosing to transfer accumulated crypto assets into a trust can be incredibly effective in terms of inheritance tax planning, primarily as doing so will offer a range of exemptions on certain types of assets as well as act to protect any income or capital gains tax generated over time from inheritance tax.

When establishing a trust, asset holders are able to outline how funds are to be disbursed after their passing as well as decide which beneficiaries are to receive said funds. A well-executed trust will also add a degree of asset protection, for example, any crypto assets stored within a trust will be exempt from taxation or creditors should the holder experience any serious financial hardship during their lifetime.

When selecting the most appropriate type of trust in which to store crypto assets, holders should discuss their plans with a financial advisor or estate planner to ensure that the option chosen can facilitate what they wish to achieve. In most situations, investors will be presented with four main options, including:

Bare trusts

Assets stored in a bare trust are held in the name of the trustee, though the beneficiary will retain the right to all capital and income generated by held assets which they will be permitted to access at any time provided they are aged 18 or over (16 in Scotland). This type of trust is generally used to pass assets on to young people as a form of inheritance, with the trustee controlling the assets until the beneficiary becomes a legal adult

Interest in possession trusts

Assets stored in this type of trust are controlled by the trustee, though all income generated will be passed on to the beneficiary as it arises. All income paid through the trust will be taxable once received like income tax, though the assets themselves will remain protected and inaccessible to beneficiaries so long as the trust is still active

Discretionary trusts

When operating a discretionary trust, the trustee is able to decide how all generated income is used and, in some cases, the capital itself. This will typically include what gets paid out, who is to be paid, how frequent payments should be, as well as any extra conditions imposed on beneficiaries to provide some financial help to inheritors

Mixed trusts

This describes a combination of two or more trusts in which the different parts of each trust will be taxed according to specific rules, typically these trusts will be used to cater for a particular set of circumstances, such as inheritance for children of different ages

How to transfer cryptocurrency to a trust

Transferring cryptocurrency into a trust is a relatively simple process, though a financial advisor or estate planner will be required to set up the trust on behalf of the asset holder. A legal arrangement will be drawn up in which the asset holder will be able to set specific rules outlining how stored assets are to be used and distributed to a chosen number of beneficiaries.

As with any legally binding document, the wording used to describe a cryptocurrency investment trust must be carefully considered. At least two trustees will be required to oversee the management of the trust, with at least one of these individuals being knowledgeable in the handling of cryptocurrencies, including how to access wallets, navigate exchanges and understand the workings of crypto markets.

With these factors outlined carefully in a legally binding document, all crypto assets can be transferred to the trust by a preappointed financial advisor with the described rules being immediately applied.

Is it worth investing in cryptocurrency UK?

Though some investors may view crypto asset investments as a potentially volatile asset, the UK government’s plans to regulate the crypto market, classify stablecoins as a recognised form of payment and drive the UK towards becoming a global crypto asset technology hub should act as clear indicators that investing in crypto will remain worthwhile for investors that possess a good understanding of the crypto market.

Provided that asset holders take the time to consult with financial advisors and estate planners to gain a clear picture of UK practises and guidelines for crypto tax treatment, the formation of a well-executed trust can have tax benefits as well as protect any income earned from crypto assets in order to strengthen both retirement and inheritance funds for asset holders as well as their chosen beneficiaries.

There’s a reason why trusts often factor in to how the wealthy are planning tax reductions and ensuring that their assets are protected from avoidable charges, though unlike some resources, the formation and execution of a trust is easily accessible to investors from all backgrounds to consider as part of an effective tax planning process.

R&D Tax Credits and Advice to Help Tech Startups

lpb@louisbarnett.org (Louis Barnett) — Thu, 27 Apr 2023 15:28:29 GMT

The research and development of new technologies has long been essential to the growth of UK-based tech startups, as when dealing with cutting-edge and emerging industries, teams must be able to facilitate organic demand in competitive markets by continually improving upon available products.

The research and development of new technologies has long been essential to the growth of UK-based tech startups, as when dealing with cutting-edge and emerging industries, teams must be able to facilitate organic demand in competitive markets by continually improving upon available products.

By making calculated investments into R&D projects, businesses can gain key advantages in terms of streamlining production processes, reducing costs and ultimately fine-tuning products to stay ahead of the competition. These are just some of the reasons why the UK government has historically provided incentives like R&D tax credits and grants to help account for the cost of vital R&D-related projects.

Despite the modern R&D tax credits system proving mostly beneficial to startups since its inception in 2000, the government has recently announced drastic changes to be implemented in April 2023. In short, startups investing in new technologies will be provided less tax relief, whilst larger businesses are expected to receive more support. For UK-based companies trying to navigate these new rules, this guide will cover a range of available R&D tax credits and advice to help tech startups claim relief.

What are R&D tax credits?

R&D tax credits are a tax incentive introduced by the UK government in 2000 designed to help SMEs (and some large companies) reduce some of the costs associated with the research and development of new technologies, with the aim of encouraging UK startups to increase ongoing R&D investments.

So, what is research and development? Or more appropriately how is this process viewed in relation to the R&D tax credits scheme? According to HMRC, only projects intended to make an advance in science or technology qualify for the R&D tax relief, theoretical and social sciences will not be accepted.

The project must also relate to the company’s registered trade, or one that the company intends to start up as a direct result of the research and development performed. HMRC will request that the business explain some fundamental aspects of the R&D project before being accepted, including:

How the project searched for an advance in science and technology
How the business had to overcome uncertainty related to the project
How the business attempted to overcome this uncertainty through R&D
Why the uncertainty could not be solved by a professional in the field

How are R and D tax credits changing?

What are R and D tax credits? (pre April-2023)

Looking into the previous R&D tax credits scheme in a little more detail reveals that the available tax relief offered to UK companies could be divided into two packages. For SMEs with less than 500 staff, turnover below €100 million and gross assets under €86 million, an extra 130% deduction rate was applied on top of the standard 100% to create a 230% total tax deduction applied to qualifying costs from yearly profits.

Additionally, startups meeting these criteria who record losses at the end of the tax year would be eligible to claim R and D tax credits worth up to 14.5% of their total reported losses for the year.

The second package was aimed towards larger entities, though as qualifying companies must only report turnover and gross assets above the previous threshold, smaller companies could still become eligible. Under this relief program, companies could claim tax credits equalling 13% of all R&D-related costs.

How do changes to R&D tax credits affect startups?

The changes due to be enacted in April 2023 are set to drastically lower the available SME R&D tax credits deduction rate from an additional 130% to only 86% of qualifying costs, equalling a total deduction rate of just 186% compared to the previous 230%. In practice, this means tech startups currently engaged in long-term R&D projects are set to see their costs increase by as much as 44%.

In addition, SMEs and startups reporting financial losses will see their claimable R&D tax credits drop significantly from 14.5% of total surrendered losses to 10%, again hindering long-term R&D projects.

Comparatively, larger companies who previously qualified for the 13% fixed R&D tax credits rate will see their claimable rate increase to 20%. These changes have been met with considerable criticism from across business sectors, with some studies suggesting that the average UK startup could lose between 30%-40% in relief that they previously received, equalling an estimated £100,000 per year.

The UK government has recognised some of this criticism, and in response have announced a new higher R&D payable credit rate for research and development intensive businesses. Loss-making SMEs with an R&D intensity of at least 40% will be eligible for a higher rate of SME payable credit taking effect for expenditure incurred on or after 1 April 2023, in continuity with the current payable credit rate, claimed as they currently do in their Corporation Tax return.

The government does remind SMEs that due to this change being legislated in a future Finance Bill, companies will only be permitted to claim such relief at a later date, after the legislation is in place. Companies making a claim for relief before this will receive the new 10% rate from 1 April 2023, though R&D intensive SMEs wishing to claim additional support are advised to delay their submissions or amend their claims once the legislation is in place, more info can be found here .

R&D tax credits: what can be claimed?

Though at present it appears unlikely that the government will reassess these changes, UK-based crypto startups can insulate themselves to some extent by ensuring that all ongoing research and development projects are appropriately labelled within the confines of HMRC’s official guidelines.

To do this, it’s vital that a small business understands which costs HMRC currently views as eligible for R&D tax credits and can answer the question: why is research development important to your operations?

The costs covered by R&D credits currently include:

Material costs – Any costs incurred for materials used specifically for R&D projects may be included in an R&D tax credits claim, this could be materials used to create prototypes, to perform trials or to manufacture a final product, though not if the product was later sold
Staff costs – Employee wages, national insurance/pension contributions and expenses directly related to R&D projects can form part of a claim, though these figures must be accurately apportioned, that is if a person spends 50% of their time working on an R&D project only 50% of their combined costs will become eligible for R&D tax credit relief
Utility costs – Any consumable utility used up during R&D, including water, electricity, fuel and gas, though only the amounts directly used during active R&D projects/processes/trials
Software costs – If a tech startup is required to buy a design or control program to perform an R&D project, purchasing and licensing costs may be included in their claim, though if the software is also used for non-R&D-related work these costs must be accurately apportioned

How to make a research and development tax credit claim

It is possible for startups to compile and submit a successful R&D tax claim themselves, though it’s advised that businesses hire a tax professional to ensure that all possible expenses are correctly and appropriately labelled to maximise the relief awarded, especially with the new regulations in effect.

When considering which expenses will qualify for R&D tax credits, startups must ensure that the work they’re performing is unequivocally centred around the advancement of science and/or technology. For startups in the crypto space , some blockchain research activities can qualify for tax relief, including:

Developing new blockchains
Developing new hardware/software wallets
Developing new nodes
Developing blockchain security solutions
Developing smart contract infrastructure
Developing new APIs

Research and development grants

In addition to R&D tax credits, the government does typically offer a range of grants to help fund certain R&D projects. Though there are no dedicated crypto-related research grants available at the time of writing, the government has announced plans to make the UK a global crypto asset technology hub in the coming years, so it’s worth checking the UKRI website for updates on crypto grant funding.

Summary

Despite the incoming changes to the R&D tax credits scheme having the potential to negatively affect UK-based tech startups, understanding how to appropriately classify research and development projects in line with HMRC guidance can help to ensure that companies don’t lose vital tax relief.

For startups requiring some assistance in learning how to account for R&D tax credits, or those who seek support in navigating the newly imposed rules, please contact our team of highly skilled crypto accountants to help guide your business in the right direction. Click here to book a free consultation.

Government Cuts to Capital Gains Allowance: What This Means for Crypto

lpb@louisbarnett.org (Louis Barnett) — Thu, 09 Feb 2023 16:42:23 GMT

The ownership of crypto assets has been steadily climbing in the UK over the last few years, with recent figures showing at least 6.2% of the adult population holds some form of cryptocurrency , equating to around 4.2 million individual traders when relevant data was last published back in 2021.

The main draw for many investors interested in diversifying their portfolios through crypto trading remains the platform’s decentralised nature, providing asset holders with a sense of safety and security by insulating investments from mainstream economic instability and providing unmatched data reliability.

Though this has always been the foundation holding up the cryptocurrency market, as more individuals adopt into the framework, more attention from regulatory bodies will follow. This is where the crypto sphere finds itself in 2023, with increasing levels of governmental legislation impacting how assets are to be monitored and managed. Arguably the most important of which for UK-based traders being the recently announced cuts to capital gains allowances, but what does this mean for crypto?

Understanding crypto assets

Before focusing on how recent legislation is likely to impact crypto trading, it’s important to define exactly what regulatory bodies mean when they begin to discuss crypto assets. Though the history of crypto currency dates all the way back to 2009 , the technology and infrastructure guiding the industry has grown and developed to such an extent that some modern tokens and assets are essentially novel concepts.

The most commonly discussed types of crypto asset amongst the public are payment currencies like Bitcoin (BTC) and Litecoin (LTC), but there are at least six other distinct digital asset types that function in a discernibly different manner, and as a result are often treated as unique technologies.

Payment currencies - As the name suggests, these digital assets are used as an alternative form of payment to traditional fiat currencies. Utilising blockchain technology, tokens are encrypted, regulated and able to verify the transfer of funds between parties
Blockchain economies - Blockchain economies add an additional layer of functionality to digital assets by not only acting as a usable currency, but also allowing for the creation of decentralised tokens and apps built directly from the relevant platform
Privacy coins - Privacy coins are developed and designed to keep all transactional data completely secret, this is achieved by utilising additional layers of encryption to completely mask the identify, wallet address and balance of users whilst also hiding the monetary value of funds sent and received to anyone other than the sender and recipient
Utility tokens - Utility tokens are notably distinct from most other forms of crypto asset as their main purpose is to improve certain aspects of the blockchain economy. Typically, these tokens are not utilised for investment, and can be defined as such using the Howey test
Stable coins - Stable coins were developed to bridge the gap between traditional regulated currency and decentralised crypto assets, their value is intrinsically linked to existing asset classes to avoid some of the volatility experienced in the crypto market
Security tokens - Security tokens are used to represent an investor’s stake in a blockchain project, and as such are treated in a similar fashion to traditional stocks. Investment here comes with a reasonable expectation of future profit
Non-fungible tokens (NFTs) - NFTs are a unique form of digital asset in that their value is determined mainly by their perceived rarity to the community. NFTs are not commonly used as currency and are instead minted and purchased using crypto or traditional monetary funds

How crypto asset types affect taxes

For holders of crypto assets, it’s important to understand exactly how each asset type functions as in some cases this can change the way that governmental body's handle expected taxes relating to investments. For example, payment currencies like Bitcoin (BTC) and Litecoin (LTC) have long been viewed by the UK government as similar to traditional shares, and so accrue similar expected taxes.

Conversely, crypto assets not primarily utilised for investment such as utility tokens have seen a more complicated taxation history, as regulatory bodies attempt to determine exactly how to treat any taxable profits gained from the trading and purchasing of assets in line with existing investment vehicles.

The most recent change in the legal recognition of crypto asset types has been the UK government’s announcement that stable coins will be treated as a recognised form-of-payment in the near future, primarily due to a reduced chance of volatility by way of their value being linked to existing currency.

How capital gains tax affects crypto assets

In the UK, there are two main ways that crypto assets are taxed, those being as part of the holder’s income tax rate and their capital gains tax rate. Income tax rates affect crypto profits viewed by the government as additional income, commonly as a result of mining assets and/or staking rewards.

Capital tax rates, on the other hand, are determined by the amount of profit gained when selling, swapping, spending or gifting crypto to anybody other than the holder’s legally recognised spouse. Capital gains tax rates in 2022/23 have been set at either 10% for individuals with an annual income below £50,270, or 20% for those bringing in an annual income greater than the £50,270 threshold.

This percentage tax rate is only applied to profits gained over a predetermined annual tax allowance, referred to as the annual exempt amount. In previous years, this allowance has been set at a fairly high value of £12,300 per person, though in 2022 it was announced that the figure would be reduced to £6,000 in April 2023 before being further stripped back to £3,000 during the following tax year.

This is where the changes to the UK’s capital gains allowance is set to have the biggest impact on crypto . With the volatile nature of the current market, investors holding onto assets in the hope that future corrections will offset their losses may be faced with much higher tax bills than they had planned for, potentially causing more measurable unrest as traders weigh up the value of selling their assets at a loss.

As is true for traditional investments such as shares and stocks, crypto losses can typically be offset against gains in the same, or in some cases future tax years. To achieve this, asset holders must realise their losses by transferring (or disposing of) tokens to an unconnected party via a market exchange.

The problem here is that in order to avoid the drastic cuts to capital gains allowances, asset holders may feel they’re required to perform these transfers before the January tax deadline of each affected year, increasing the potential for measurable market impacts as assets are bought and sold in large amounts.

It will also bring more people within the scope of completing a UK self assessment, before 6 April 2023, you only had to declare your Crypto disposals profits were greater than £12,300 or sale proceeds from disposal where more than £49,200. From 6 April 2023 profits now need to be reported if greater than £6,000 or sales proceeds are more than £18,000.

Reducing the impact of capital gains allowance cuts

On the face of things, these drastic cuts to the annual exempt amount for UK crypto asset holders have the potential to cause a great deal of worry, though traders are presented with ample time to prepare themselves and position their investments in such a way that the impact of coming cuts may be mitigated.

Losses reported to HMRC at the end of the tax year can be used to reduce total taxable gains, with any remaining losses carried forwards toward the next tax year to be filed as allowable losses.

Additionally, losses may be controlled by ‘bed and breakfasting’ tokens. Using this rule holders can exchange tokens for a more stable asset and, provided that they buy back the token within 30 days, use the basis of any logged trades within this time frame as the grounds for calculating their gains and losses.

A further method for mitigating the impact of capital gains allowance cuts can be found by banking potential losses with select tax authorities in order to offset against future gains. In this procedure , crypto assets that would cost more to dispose of than they’re currently worth will be logged by HMRC as a ‘negligible value claim’ and as a result all associated losses are able to be carried forward indefinitely.

This process has been devised by HMRC in an effort to stabilise the cryptocurrency market and reduce worries amongst investors, with the tax authority currently working alongside crypto exchanges to share customer information and use this data to remind investors of their legal responsibilities and liabilities.

Will lost or stolen crypto assets be affected?

Lost or stolen private keys are far from unheard of in the crypto sphere, but if HMRC is aware of the digital assets stored within active but inaccessible wallets, they may still consider the owner to be legally responsible for existing funds, and in turn the monetary value that remaining assets have accrued.

This means that if the crypto assets stored within affected wallets are stolen or transferred, tax authorities will not be expected to treat associated transactions as legally defined disposals, and so the owner will be unable to file relevant losses against any of their future gains.

If holders of inaccessible wallets wish to address this issue before upcoming capital gains allowances are reduced, they will be required to prove that the affected assets are eligible to be classed as a negligible value claim on the grounds that the funds they’re currently holding have become essentially worthless.

To do this, wallet owners will need to demonstrate to HMRC that there is no realistic prospect of recovering affected crypto assets by filing a claim . If this is accepted by the tax authority, assets will be treated as though they’ve been disposed of and re-acquired for no value, allowing holders to claim tax relief for a capital loss.

Summary

Upcoming capital gains allowance cuts are by no means welcomed with open arms by much of the crypto currency community, though provided that asset holders are well educated regarding the particular type of crypto assets in their possession, there is time to reduce potential negative impacts.

Filing potential losses with HMRC before the end of each affected tax year will allow crypto asset holders to log current values and carry them forward into upcoming tax years, and in some cases classify losses as negligible value claims to provide some degree of relief amongst a volatile market.

Check if you need to complete a UK tax return, as with a reduced capital gain annual exception it will mean more people will need to complete one for the first time.

Additional methods of loss control such as ‘bed and breakfasting’ assets may prove helpful to investors holding crypto currencies and stable coins, whilst holders of inaccessible wallets may wish to file their investments as unrecoverable to utilise losses against expected gains, regardless of which method is chosen it’s wise to make plans sooner rather than later to minimise the impact of capital gains allowance cuts.

crypto-concepts-accounting

A Guide to Tax on Cryptocurrency in the UK

Do you need advice on tax on cryptocurrency? It’s best to be aware of your tax liabilities sooner rather than later, because the penalties for not doing so can add up quickly.

How it works: Are you a business or an individual?

Mining cryptocurrency as a business

Tax on Staking or Lending as a Business

What is a disposal for capital gains purposes?

How much tax do you have to pay on cryptocurrency?

Trading one cryptocurrency for another

Paying for goods or services with cryptocurrency

Moving crypto between your own wallets or accounts

Tax on ICOs or IEOs

How to minimise your tax burden

1/ Make use of your annual capital gains tax allowance

2/ Offset your crypto losses

3/ Claiming losses for defunct coins

4/ Leveraging deductible costs

Final thoughts

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A Beginner’s Guide to Crypto

We’ve all heard of cryptocurrency, but how many of us actually understand what it is and how it works? This guide will tell you what you need to know – and help you decide whether it’s the right investment for you.

What is Cryptocurrency?

A glossary of key Crypto terms

Cryptocurrency

Decentralisation

Distributed/Public ledger

Centralised ledger

Blockchain

NFTs

How else does crypto differ from regular currency?

Pros and Cons of Investing in Crypto

Pros:

Cons:

Taxes and Cryptocurrencies

Crypto doesn’t have to be cryptic

A Guide to Capital Gains Tax on Cryptocurrency in the UK

Is there a specific UK cryptocurrency tax?

How is crypto taxed in the UK?

When do I need to pay crypto tax as Income Tax?

Band Taxable Income Range Tax Rate ﻿

When do I need to pay Capital Gains Tax on crypto in the UK?

How much CGT will I have to pay on my crypto profits?

What if I make a loss on my crypto assets?

How to minimise paying Capital Gains and Income Tax on cryptocurrency in the UK

Does HMRC track crypto?

Get expert advice on crypto tax UK

When Can Trusts be a Good Tax Planning Tool for Crypto Investors?

What is tax planning?

Identifying crypto assets

Types of cryptocurrency investment trust

Bare trusts

Interest in possession trusts

Discretionary trusts

Mixed trusts

How to transfer cryptocurrency to a trust

Is it worth investing in cryptocurrency UK?

R&D Tax Credits and Advice to Help Tech Startups

The research and development of new technologies has long been essential to the growth of UK-based tech startups, as when dealing with cutting-edge and emerging industries, teams must be able to facilitate organic demand in competitive markets by continually improving upon available products.

How are R and D tax credits changing?

What are R and D tax credits? (pre April-2023)

How do changes to R&D tax credits affect startups?

R&D tax credits: what can be claimed?

How to make a research and development tax credit claim

Research and development grants

Summary

Government Cuts to Capital Gains Allowance: What This Means for Crypto

The ownership of crypto assets has been steadily climbing in the UK over the last few years, with recent figures showing at least 6.2% of the adult population holds some form of cryptocurrency , equating to around 4.2 million individual traders when relevant data was last published back in 2021.

Understanding crypto assets

How crypto asset types affect taxes

How capital gains tax affects crypto assets

Reducing the impact of capital gains allowance cuts

Will lost or stolen crypto assets be affected?

Summary

Band Taxable Income Range Tax Rate