For a long time, investors in Crypto have struggled to fully understand the tax requirements associated with their chosen investments. The HMRC is now making certain aspects of crypto tax clearer to investors in hopes of clearing up the murky waters that have engulfed the currencies for years.
Declaring gains and losses to the HMRC is integral to the investment process but when investors are dealing in currencies that are not fully understood by the authorities, the tax laws that govern their actions can seem a bit mismatched to the value realities of said currency. The new guidelines make it much easier to understand how taxes on cryptocurrencies should be paid. Some of the differences found in the new crypto-tax breakdown show a dependency on the nature of the transactions.
Taxation of Cryptoassets
Investors can now look out for three primary asset types when it comes to taxable crypto exchange tokens, utility tokens, and security tokens. No matter what the coin is or how it was purchased, the related taxes come down to how they are used.
What are crypto assets in the eyes of the HMRC?
Cryptoassets is a term used to describe a large number of different digital assets which hold value. Of the three types recognised by the HMRC, exchange tokens are the focus of the new tax regulations. However, that does not necessarily mean the other two (utility tokens, and security tokens) cannot be taxed under the new law.
To determine how taxation occurs an investor must consider how their cryptoassets are being used as the usage supersedes the type. The decision taken on how cryptocurrencies should be taxed comes down to the government’s position that cryptocurrencies are not actually money, and should not be taxed as such. Instead, taxation will focus on how it is used to leverage monetary value and other assets.
Primary Types of Taxation
Two types of taxation investors in crypto can expect are Capital Gains Tax and Income Tax. In a similar fashion to how taxation would be handled when selling off a property or any other asset, Capital Gains Tax looks at how much monetary benefit the cryptoassets afforded the investor. Income Tax law comes in when individuals are paid in cryptocurrencies. Another consideration for anyone looking to pass cryptocurrencies down to future generations, is that Inheritance Tax is now also applicable to cryptoassets.
What Should You Do?
In light of these new regulations, it is advisable that anyone in the U.K. dealing in crypto keep records of all transactions associated with the cryptocurrencies they are working with. This may come as a major game-changer for many because it goes against the very core structure of many crypto philosophies.
The decentralized nature of crypto means many are built not to create records of any kind when they are moved around. That anonymity has always been a major attraction, as well, so people will now have to change the ways they conduct their business. It should be expected that audits and probes into crypto use will soon become commonplace, and it is air on the side of caution.