Cryptocurrency - What Is A Sale - Gain Or Income?

Cryptocurrencies, such as Bitcoin, are a type of electronic cash; designed to stand apart from any government or bank they work through a computer network. Records confirming Individual ownership of the 'coins' are stored in a digital ledger with secure transaction records. Coins can be bought or sold with other currencies, used to purchase goods from sellers who are willing to accept cryptocurrencies as payment, make investments in various assets and as investments themselves. However, the 'downside' is that the system is unregulated with no central bank or government to support the currency should something go wrong. That’s where we come in: a cryptocurrency accountant UK offering a crypto tax service.

It has taken a long time to be accepted as a currency in its own right but in April 2022 HMRC announced moves to recognise one type of cryptocurrency ('Stablecoins') as a valid form of payment. Such tokens are intended to maintain a 'stable' value typically pegged to a currency.

Tax charge

Published in March 2021, HMRC’s Cryptoassets Manual outlines HMRC's view of the tax position confirming that in the majority of circumstances the investment will be subject to Capital Gains Tax (CGT) on disposal. However, Income Tax and National Insurance contributions, as would be explained by our tax consultant in East London, will be charged on cryptoassets received from:

·         an employer as a form of non-cash payment;

·         mining, transaction confirmation or airdrops; or

·     where the individual runs a business carrying on a financial trade in cryptoassets - this will be     deemed as taxable trading profits.

Therefore CGT will be relevant on disposals as follows:

• Selling for any other currency - crypto or not.
• Exchanging tokens for a different type of token.
• Paying for goods and services.
• Gifting unless to a spouse or civil partner.

There will be transactions where there will be no CGT disposal e.g. if an owner moves tokens between “wallets” such that no transaction takes place as the owner retains beneficial ownership.

A consultation with one of our crypto tax advisors can provide further personal cryptocurrency advice. Get in touch with our cryptocurrency accountant UK.

Allowable expenditure

Certain costs on disposal can be deducted:

·         transaction fees paid for having the transaction included on the distributed ledger;

·         advertising for a purchaser or a vendor;

·         professional costs to draw up a contract for the acquisition or disposal of the tokens; and

·         costs of making a valuation or apportionment.

Calculation of cost

HMRC has precise guidance for crypto cost basis methods. Unless the token can be identified with the sale of particular tokens then HMRC requires the 'pooling method' to be used. Such a method already applies to shares and securities with the TCGT Act 1992 stating that it also applies to ‘any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired - hence the use for any trading in cryptocurrencies. Our crypto tax advisors can offer specialist guidance to further that of HMRC’s cost basis methods.

The three possible methods of calculation are:

1.      Same-Day: matching purchases and sales of the same day .

2.      Bed and Breakfast: matching sales within 30 days of purchase ('first in first out' basis),

3.   'Pooling': if the two rules above are not relevant, the cost of any coin is calculated by adding up the total amount paid for all assets and dividing it by the total amount of tokens held to find the value per token. The pool is an aggregate of all the acquisitions which are not sold within the subsequent 30 days. Therefore, an average cost for the cryptoassets in the pool is maintained and a pro-rata cost is deducted from disposals using the matching rules.

Practical Point

Proof that HMRC is taking an increased interest in such transactions was confirmed when, in August 2019, crypto exchanges that have business in the UK, such as eToro, Coinbase and CEX.IO, received letters from HRMC requesting customer data and transaction history. Following which, in November 2021, HMRC issued letters reminding those who have traded in cryptoassets of their responsibilities to report gains through a self-assessment tax return.

Partner Note

HMRC Cryptoassets Manual

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It’s been a long time coming, but in April HMRC announced moves to recognise one type of cryptocurrency (‘Stablecoins’) as a valid form of payment. This means that it will be treated and taxed like other investments. In this article you can learn more about the taxation rules surrounding this particular type of cryptocurrency.

NIC position if you are employed and self-employed, maximum contributions and deferment

Despite the increase in National Insurance Contributions (NIC) in the April 2022 Spring Statement (the increase being replaced by the Health and Social Care Levy in July 2022) there remains a significant financial advantage for individuals working as self-employed rather than as employees. However, complications can arise where an individual is both employed and self-employed as they may find themselves paying too much NIC for no extra benefit. With different rates for the 2022/23 year, individuals who are both employed and self-employed could easily find themselves in this situation unless aware of the rules. That’s where our tax consultant in East London comes to the fore, offering specialist cryptocurrency advice that will prevent you from ending up in these situations.

Following changes to the employees primary threshold (PT) the lower profits limit for Class 4 contributions was increased to £11,908 for 2022/23, maintaining alignment with the annual PT. However, the rate of Class 4 NICs for the self-employed remains lower than the rate paid by employees (10.25% v 13.25%), and the self-employed face no equivalent to employer NICs (15.05%). The Class 2 Small Profits Threshold remains unchanged for 2022/23 at £6,725.

Calculation difficulties can arise where there is a mix of earnings such that the Class 1 limit is not exceeded separately but by paying NIC based on total earnings (whether that be for an additional second job or self-employment) the maximum amount is exceeded and a refund due. The annual maximum is equal to 53 primary Class 1 contributions at the upper earnings limit (£967 per week x 53 weeks = £50,270 per tax year).

To ensure that such overpayments were not made in the past, an application had to be made to HMRC for deferment. Currently HMRC state that they will automatically carry out this calculation on receipt of the self-assessment tax return. However, this assumes that the individual’s NIC record is complete and correct. Deferment will be accepted by 14 February for a 2022/23 year claim with any application after that date being considered but only with agreement with the respective employers.

Deferment

Neither Class 2 nor Class 4 NIC can be deferred; deferment only applies for Class 1 NIC and only if any of the following are relevant:

·         Class 1 NIC with more than one employer;

·         earn £967 or more per week from one job over the tax year;

·         earn £1,157 or more per week from 2 jobs (combined income) over the tax year.

The formula for the calculation is:

Upper earnings limit = (X-1) x PT

where X is number of jobs

In practice a reduced rate of 3.25% on weekly earnings between £190 and £967 in one job (not both) instead of the standard rate of 13.25 % for the tax year 2022/23.

Practical Point

Each individual employed in more than one employment or employed and self-employed will have an individualised maximum liability for either Class 1 contributions or Class 1 and Class 2 contributions based on the earnings received. HMRC's National Insurance Manual provides examples for calculating the Class 1 and 2 annual maximum for various earners with differing employment patterns.

Partner Note:

Health and Social care Levy Act 2021

National Insurance Contributions (Increase in Thresholds) Bill 2022

HMRC National Insurance Manual NIM 7070

Social Security (Contributions) Regulations 2001 Reg 90 and 95

(SI 2001 No 1004)

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You may find yourself paying too much National Insurance if you are both employed and self-employed. Reading this article will help you understand the rules around national insurance contributions for both employed and self-employed wages and how they should apply to you. Understand the rules and ensure you are not paying too much for no extra benefit.

Conditions and problems surrounding the claim for Incorporation relief

Businesses become companies for a variety of reasons. Not so long ago it was mainly as a tax planning tool but increasingly the differences in tax rates between the self-employed and a company mean that unless the profit is in excess of approximately £50,000 the increased administration involved with a company may not make it worthwhile to incorporate purely for tax savings.

Where the decision has been made to incorporate, the transfer is subject to Capital Gains Tax (CGT) as it involves the disposal by the sole trader or partnership owner of chargeable business assets to the company (e.g. goodwill, land/buildings). However, the charge can be deferred using Incorporation Relief (IR). To take advantage of this relief the business must be transferred as a going concern, all the assets must be transferred (apart from cash) and consideration for the transfer must consist wholly (or partly) of shares in the company issued to the sole trader. Ownership of any land or buildings is transferred into the name of the company (something that might not be possible should the property be subject to a mortgage and therefore a remortgage may have to take place).

 The disposal is usually treated as taking place at ‘market value’ on the basis that the parties are ‘connected persons’. ‘Market value’ is the amount that the property might reasonably expect to fetch if placed on the open market. A company is 'connected' to another person is if that person has control of the company or if persons connected with them have control. As a 'connected person' the disposal is at 'market value' even if there is no monetary consideration.

Under an IR claim the CGT charge is postponed ('rolled over') until the person transferring the business disposes of their company shares. The 'rolled over' gain is then deducted from the cost of the shares such that the gain on sale comprises the amount of gain 'rolled over' and the gain made on the increase (if any) of the final sale price over the market value at the time of incorporation. If part of the consideration for the transfer is in cash, then the amount of gain 'rolled over' is reduced proportionately.

Importantly the relief applies automatically if the conditions are met, although an election can be made to disapply. A claim may not be possible because not all of the business assets are to be transferred, for example or because the exchange for shares means that the value can only be withdrawn by the sale of those shares and, being a private limited company, the market for those shares will be restricted. IR may also wish to be disapplied should the gain be covered by the annual exemption or there are losses brought forward available to offset.

One area that could result in an IR claim being refused is where the sole trader or partnership has a loan intended to also to be transferred to the company. Legislation requires that IR only applies to the extent that the consideration is shares but the taking-on or settlement of a debt is strictly consideration for the transfer. Although HMRC has no problem with this by concession (ESC D32), difficulties could arise with the lender where the loan moves from private client into corporate hands, with different borrowing criteria. If the company were to take out a loan and used that to repay the owner’s personal loan, such consideration is not covered by ESC D32 and the IR would be restricted. In practice, the lender and borrower agree to new refinancing terms on the understanding that the loan will be taken over by the company shortly thereafter. The owner uses the advance to repay their existing debt, enabling the loan to fall within the concession, such that IR is then fully available.

Practical Point

If it is intended not to transfer some assets, other CGT reliefs should be considered e.g. Business Asset Disposal Relief or Gift Relief (although these also have conditions). If another relief is preferred, either incorporation relief must be disapplied (easier option) or ensure that the requirements for incorporation relief are broken (e.g. by retaining some non-cash assets outside the company).

Partner Note:

HMRC Helpsheet HS276

TCGA 1992 s162

HMRC Capital Gains Tax Manual CG65700C

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Many businesses have, in the past, incorporated to help make tax savings. However, increasingly there are differences between self-employed and company tax rates which means that incorporation may not be worth it unless your company is making profits in excess of £50,000. Learn more in this article.