A step-by-step guide to paying taxes on your Cryptocurrency Investments?

Paying taxes on cryptocurrency gains in the UK involves several steps. Here's a detailed overview of the process:

1. Understanding Taxable Events

In the UK, taxable events for cryptocurrencies include:

• Selling cryptocurrency for fiat currency (e.g., GBP).
• Exchanging one cryptocurrency for another.
• Using cryptocurrency to pay for goods or services.
• Giving away cryptocurrency to another person (unless it's a gift to your spouse or civil partner).

2. Calculating Gains and Losses

You need to calculate your gains and losses for each taxable event. This involves:

• Determining the Cost Basis: The cost basis is the amount you originally paid for the cryptocurrency, including any transaction fees.
• Calculating the Gain or Loss: The gain or loss is the difference between the cost basis and the value of the cryptocurrency at the time of the taxable event.

Keep in mind that they are cases where you can't just calculate the gain by using the average cost basis, in particular if you have sold and they bought back some tokens within the same month (anti-avoidance rule to prevent what's called bed and breakfast).

3. Don't forget Income Tax

If you receive cryptocurrency through activities like mining, staking, or as payment for services, it might be subject to Income Tax instead of CGT. You'll need to:

• Report it as miscellaneous income on your Self-Assessment tax return.
• Pay Income Tax based on your tax bracket (20%, 40%, or 45%).

4. Keeping Records

It's crucial to keep detailed records of all your cryptocurrency transactions. These records should include:

• Dates of acquisition and disposal.
• The amount and type of cryptocurrency involved.
• The value in GBP at the time of each transaction.
• Any transaction fees incurred.
• The purpose of the transaction.

5. Filling Out the Self-Assessment Tax Return

If you have cryptocurrency gains that need to be reported, you'll need to fill out the Self-Assessment tax return. Here's how:

1. Register for Self-Assessment: If you're not already registered, you need to register with HMRC to file a Self-Assessment tax return. Once you are registered you will receive a 10-digit code called a UTR (Unique Tax Reference Number) that will allow you to register on the HMRC website to file your tax return. Alternatively, you can hire an accountant to do it for you.
2. Complete the Tax Return:
   • SA108 Form: If doing the return on paper use the SA108 form to report capital gains. This form is part of the Self-Assessment tax return. If doing it online just follow the instructions on the HMRC website.
   • Filling in Details:

• Report the total gains, costs, and any allowable losses.
• Include the overall profit or loss from your cryptocurrency transactions.
• Declare the total value of all your disposals if they exceed the annual exempt amount.

6. Paying Capital Gains Tax (CGT)

• Annual Exempt Amount: For the tax year 2023/24, keeps in mind that the annual exempt amount for individuals has now been reduced to £6,000. You only pay CGT on gains exceeding this threshold (but taking into account all the other gains as well).
• Tax Rates: CGT rates on cryptocurrency gains are:
  • 10% for basic rate taxpayers (if the total taxable income and gains are within the basic income tax band).
  • 20% for higher and additional rate taxpayers.

7. Submitting the Tax Return and Paying Taxes

• Deadlines: The deadline for online submission of the Self-Assessment tax return is 31 January following the end of the tax year. For example, for the tax year ending 5 April 2024, the deadline is 31 January 2025.
• Payment: You need to pay any tax owed by the same deadline (31 January).

8. Adjustments and Claims

• Claiming Losses: If you have incurred losses, you can use them to offset gains in the same tax year or carry them forward to offset future gains.
• Amending Returns: If you need to make corrections to your tax return, you can do so within 12 months of the original submission deadline.

9. Seeking Professional Advice

Given the complexity of cryptocurrency taxation, it might be beneficial to seek advice from a tax professional or accountant who is knowledgeable in this area. Please also refer to our other articles discussing the taxation of cryptocurrency gains in the UK.

Summary

1. Identify taxable events.
2. Calculate gains and losses.
3. Don't forget that some of the income could potentially be taxable as income rather than capital gains.
4. Keep detailed records.
5. Complete the Self-Assessment tax return.
6. Pay Capital Gains Tax and/or Income Tax if applicable.
7. Submit the tax return and pay taxes by the deadline.
8. Claim losses if applicable.
9. Seek professional advice if needed.

By following these steps, you can ensure you comply with HMRC regulations on cryptocurrency gains.