In the UK, understanding one’s role as either an investor or trader in cryptocurrencies is not merely a conceptual matter but a vital legal distinction that has profound implications for tax liability.
This guide aims to demystify the complex landscape of UK crypto tax and provides a comprehensive look into the definitions, regulations, and responsibilities that are essential for both investors and traders.
Definition and Comparison: Investor vs. Trader
HMRC’s Cryptoassets Manual includes some information about what constitutes trading.
The primary difference between an investor and a trader revolves around the frequency and nature of their activity, as well as the corresponding tax implications.
An investor typically buys and holds cryptocurrencies as a long-term investment, while a trader engages in frequent and sophisticated buying and selling, akin to trading in shares or securities.
This leads to different tax treatments, with investors being subject to Capital Gains Tax and traders to Income Tax.
Further, the determination of status between an investor and a trader is nuanced.
For investors, the status is determined by the absence of traits that would classify the activities as trading.
For traders, the determination depends on a number of factors and individual circumstances, known as the badges of trade, drawing guidance from existing case law on trading in shares and securities.
Luckily, HMRC states in CRYPTO20050 and CRYPTO20250 that they believe that in the vast majority of of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation or to make particular purchases. They will be liable to pay Capital Gains Tax when they dispose of their cryptoassets.
Only in exceptional circumstances would they expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activities amount to a trade in itself.
Badges of Trade – How to know if you are a trader
HMRC’s Business Income Manual outlines 9 badges of trade which describe common features and characteristics of trade. Courts have used these badges over the years as a sort of checklist to aid in definite trading activity.
Be aware that these badges are limited in their applicability, particularly in the field of financial trading. A single badge’s presence or absence is unlikely to definitively answer whether a trade is taking place.
Use this overview as a starting point but be sure to consult with a financial expert when it comes to your specific situation.
|Badge of trade||Meaning|
|Profit-seeking motive||An intention to make a profit supports trading, but by itself is not conclusive.|
|The number of transactions||Systematic and repeated transactions will support ‘trade’.|
|The nature of the asset||Is the asset of such a type or amount that it can only be turned to advantage by a sale? Or did it yield an income or give ‘pride of possession’, for example, a picture for personal enjoyment?|
|Existence of similar trading transactions or interests||Transactions that are similar to those of an existing trade may themselves be trading.|
|Changes to the asset||Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?|
|The way the sale was carried out||Was the asset sold in a way that was typical of trading organisations? Alternatively, did it have to be sold to raise cash for an emergency?|
|The source of finance||Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?|
|Interval of time between purchase and sale||Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset, which is to be held indefinitely, is much less likely to be a subject of trade.|
|Method of acquisition||An asset that is acquired by inheritance, or as a gift, is less likely to be the subject of trade.|
Tax Considerations for Investors
Investors in the UK’s crypto environment are subject to Capital Gains Tax (CGT) on profits derived from the sale of cryptocurrencies.
Capital Gains Tax ranges from 10% to 20%, depending on the income tax bracket.
Various allowances and reliefs might reduce the tax liability, such as the annual exempt amount.
Investors must adhere to specific reporting requirements, declaring gains or losses in their Self Assessment tax return.
Tax Considerations for Traders
Traders engaging in cryptocurrencies in the UK must navigate a unique set of tax rules, particularly around Income Tax.
Unlike investors, profits earned from frequent and sophisticated trading are taxed under Income Tax regulations.
Income Tax ranges from 20% to 45% for income exceeding £12,570 per year.
Traders can consider various expenses and deductions related to their trading activities, potentially reducing taxable income.
Along with Income Tax, traders may also be liable for National Insurance contributions, depending on the level and nature of trading activity.
Reporting requirements for traders are stringent, and adherence to guidelines is crucial to avoid potential penalties. Detailed records of all transactions, including dates, amounts, and associated expenses, must be maintained and submitted to HMRC.
We highly recommend consulting a tax professional to ensure accurate tax reporting for traders.
Common Mistakes & How to Avoid Them
The distinction between categorising oneself as an investor or trader in the realm of cryptocurrencies is subtle but significant. Mistakes in this categorization can lead to non-compliance with tax laws and potential penalties. Here are some common mistakes and ways to avoid them:
- Misunderstanding the Criteria: People often mistakenly categorise themselves based solely on the frequency of transactions. Understanding that trading involves a combination of factors such as frequency, sophistication, and organisation can prevent this error.
- Incorrect Tax Filing: Applying the wrong tax rules by misunderstanding one’s status can lead to incorrect filings. Consulting HMRC’s guidelines or seeking professional advice can ensure proper compliance.
- Inadequate Record-Keeping: Both investors and traders must maintain detailed records. Utilising specialised software, like our free crypto portfolio tracker, or maintaining meticulous manual records can avoid confusion and potential errors.
- Ignoring National Insurance Contributions: Traders may overlook the importance of National Insurance contributions. Awareness of all tax obligations, including National Insurance, helps in full compliance.
- Lack of Planning: Proper tax planning, considering reliefs, allowances, and specific requirements, is essential. Engaging in careful planning or consulting with a tax professional can save time and money.
File your crypto taxes easily with Blockpit
Blockpit creates the most comprehensive crypto tax reports in PDF format.
Your individual crypto tax report provides information about all your balances and transactions and can be used as proof of origin with banks or tax advisors.
It contains all relevant transactions of your account in the selected tax year and shows details such as timestamp, amount, asset, costs and fees of the individual transactions.
Using Blockpit couldn’t be easier:
1. Import your transactions
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