As a UK cryptocurrency accountant, understanding the complex regulations of crypto taxation can be extremely difficult.
However, with the right strategies, you can reduce your tax liabilities while increasing your profits.
In this guide, I'll discuss key tax considerations and actionable strategies for effectively managing your cryptocurrency taxes in the UK.
In the UK, when it comes to crypto-taxation, cryptocurrencies are viewed by Her Majesty’s Revenue and Customs (HMRC) as property.
According to this, all profits you earn in cryptocurrency exchange trading would be subject to capital gains tax or income tax, based on the type of trading that you engage in.
Tax considerations play an important role in the decision-making process, and it is essential to have a good understanding of these key factors.
Cryptocurrencies are subject to Capital Gains Tax (CGT) on the sale or disposal, which is a charge imposed on the profits that are made. At present, in terms of the CGT allowance for one year, it stands at £12,300 in tax years 2022/23, implying gains of such amount can be freely made without any taxation levied.
Income Tax: If you would be HMRC’s “trader” instead of an “investor,” your earnings from cryptocurrencies might come under the scope of income tax. This has a major influence on your amount of taxes since the income tax rates are higher than CGT rates.
The difference between trading and investment is made by HMRC. If one is identified as trading in cryptocurrencies, the profits earned might be chargeable to income tax rather than CGT. It’s very important that you keep detailed records of your trades so that you have the evidence to support your tax position.
As another idea, while filing for your taxes, it would be better to focus on maximizing your efficiency with taxes.
One of the ways to maximize the return on investment is by holding your cryptocurrencies for a long duration that could be over one year. This is because when you hold an asset for more than a year, you can benefit from lower capital gains tax rates as such gains are subject to a reduced rate of CGT.
Tax-free allowances are another tax strategy for using the annual capital gains tax allowance. By timing gains and losses in a way that maximizes the allowance, you can decrease your total amount due to taxes.
When the profits are at a minimum or a loss occurs and you undertake this step, then any losses can be derived from your cryptocurrency activities to be used in offsetting gains, lowering the overall CGT. Record all of your losses diligently so that you could be able to use them as an offset in your statement.
An alternative to manually tracking your crypto transactions is to use crypto tax management tools. These tools are specifically designed to streamline the tax reporting process for cryptocurrencies, making it easier for you to keep track of your holdings and calculate your taxable gains or losses.
They can also generate comprehensive reports that you can submit to tax authorities if needed. By utilizing such tools, you can save time and ensure accuracy in complying with your tax obligations related to crypto investments.
The application of accounting software to cryptocurrency transactions is facilitated by such accounting software as Koinly.io that has been specifically developed for cryptocurrency-based trades, thus enabling you not only to track your trades but also to make sure to do this accurately regarding taxes.
A good alternative to estimating the tax you need to pay is by using online tax calculators since these provide a summary of your income from trading activities and give you the estimated tax to pay. Still, it would be better to have a consultation with a qualified tax expert for an even more precise evaluation.
Choosing a professional who deals with crypto taxes and hiring a crypto tax accountant can be an option where you will get proper advice given your situation. A tax expert can assist you in smoothly maneuvering through the intricacies of crypto taxation, also guaranteeing adherence to the HMRC laws.
John is an entrepreneur from the United Kingdom who has been a dedicated and consistent participant in the field of crypto trading for two years. He seeks professional advice from a crypto tax accountant to plan his cryptocurrency investment as it will affect his tax return. He manages to lower his Capital Gains Tax bill by executing, at key times, the recommendations of the advisor to use strategic sales that result in real losses on offsetting gains.
Sarah is a newbie crypto trader and has no clue about handling taxes related to her cryptocurrency. She concludes that she needs to employ accounting software so as not only to record all the trades but also to count tax responsibilities. The software has proved helpful, and Sarah has managed to tell HMRC precisely of all her crypto gains and losses.
Cryptocurrency tax management in the UK is a process that must be approached with diligence and precision because you’re a trader.
The most important tax implications must be known in order to make the most of it, and you should not forget about the use of specialized services and software that will allow you to take into account all the nuances and minimize your tax burden while at the same time maximizing profits.
I hope this tip has been useful, as it is always better to seek the advice of experts when it comes to matters like HMRC regulations and tax matters, especially if you want to not only avoid penalties but also take advantage of all the possibilities available to optimize your financial situation.
