One of the first articles I wrote when I joined Publish0x was concerning how to pay taxes on Crypto income. I have decided to revisit the subject for two reasons.
When I first joined Publish0x I had few followers so the impact of the original article was limited
I want to add to the original perspective I shared, but please be aware while experienced in the field of finance I am not a tax advisor and you should always do your own research. Please also remember that while the accounting principles remain the same the exact stipulations of tax law in different jurisdictions may vary. Check out your local rules.
And so here we are.
As far as I understand taxation on crypto is comparable to governance concerning the holding of stocks and shares. The basic principle is that what I hold on a wallet or an exchange has a nominal (current value) and its actual value is not realised until it is cashed out.
Let’s have a look at BitCoin to illustrate what I mean. On 18th July 2020 I could purchase an entire BitCoin for £7294.07, but after the surge in January it surged beyond £40,000 per BitCoin. Simply which value should I declare?
Simple answer is I can’t because my tax declaration will be wrong as the price continues to fluctuate. This can lead to either on overpayment or underpayment of tax and the situation remains fluid. There for it can only be counted as taxable once it has been drawn back into fiat (and in reality that means taken out of the crypto system and returned to the bank.
Principle 1: Taxation cannot be applied while living in your wallet or on an exchange*
* Please be aware that this is complicated if utilising crypto for purchases. My simple principle on this is don’t, but I will comment further on this in the future.
When considering taxation it should always be offset against costs which includes the original capital introduced. Only when income taken as fiat exceeds these expenses does taxation apply. This may vary according to defined thresholds. In the UK the conventional application is that of Capital Gains Tax of 28% should be applied.
As a business owner, it is my intention to declare investments and fiat withdrawals on my tax return, but also declare it against expenses that I have incurred. For example those of you who follow my Noise Feed will know that just this week I felt blackmailed by Microsoft to purchase Office 2019 for £249.99. I decided on this as a one off cost rather than the monthly fee because in the long term it will prove to be less costly. I still feel cheated, but that’s the way all the software giants are going.
I could end up with a ledger (I don’t know if anybody ever uses this format anymore) that looks a bit like this. Imagine I invested £1000, I bought both Microsoft Office and a Hardware Ledger and drew £850 back into my bank account.
Keep invoices and work on the principle that if you can’t prove it you can’t claim it. This is potentially especially problematic when using cash for purchases.
You can see I am still in ‘debt’ by £549.99 although this number is nominal as I am still holding money in cypto elsewhere.
Principle 2: Declare as many expenses as you possibly can to offset profits.
Should I declare the nominal value of Crypto on my tax return?
The main problem is that governmental legislation still lags far behind the ever wider adoption of Crypto currency by the population on the whole so to find specifics is hard. I anticipate that this legal gap will soon be closed and so while you should still DYOR it seems that the principles concerning shares should apply.
For the UK taxation the basic rules concerning shares can be found at https://www.gov.uk/tax-sell-shares
However, for wider investments again there seems to be no specific advice.
The problem with a non-declaration of held crypto is that it can create a huge hole in your accounts which may flag you for further scrutiny. Imagine that you have invested £10,000 in Crypto which you then don’t declare when it comes to doing your forms this will be shown as an unexplained deficit. It may therefore be recommended that in a non-financial part of the declaration (so it doesn’t affect any calculations) you state that you have it and even give the nominal value. Capital introduced into crypto should be marked as an expense ‘Investments’ or probably something similar.
Principle 3: Transparency demands accountability and especially where seemingly unexplained gaps appear in your accounts.
Should I even declare it on a tax return if it supplements my job through which I pay taxes anyway?
This is potentially good news – you may not need to!
The Government website is a bit of a labyrinth to navigate, but the basics can be navigated to from here. Everybody is an individual so it is best if you use this site and figure out how you fit in for yourself.
https://www.gov.uk/undeclared-income
What might be more helpful is this site – although I have not verified the accuracy so as always DYOR.
https://makemoneywithoutajob.com/declaring-extra-income-to-hmrc/
In it the author states that there is no need to declare if you turn over no more than £1000 Gross additional income per year. Please remember turnover is not the same as profits (turnover = everything you receive). In many ways this actually benefits the employed more than the self-employed.
There are some additional specific scenarios, but you can easily find out if they apply to your circumstances.
Finally remember that tax avoidance is fine (setting up methods to minimise you tax burden), but tax evasion (avoiding legitimately due taxes) is wrong and the government in any jurisdiction looks on this with the same distaste as the most serious of crimes. You are stealing from the government and they take it very very personally.
So there you go that’s my latest thoughts on it and I am pleased that I am ahead of the game here as next year my business model is going to get a lot more complicated as I receive income from my Business As Usual activities, probable income from crypto and anticipated income in author royalties.
In my next article I will look at NFTs and Taxation
Thank you very much.
Take care and stay safe
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