Crypto Traders and Businesses: This is Tax Stuff to Keep in Mind

Are you a crypto trader or a crypto business? Then there are a few considerations to keep in mind. Especially if you don’t want the tax man coming over to your house and asking for a cup of tea and a chat.

While most individuals engaging with cryptocurrency are classified as investors by HMRC, different rules apply to crypto-focused businesses like mining operations, and to those operating as traders.

Determining trader status

Identifying as a trader isn't solely based on trade volume. HMRC requires evidence of operating in a business-like manner.

Key indicators include:

-Substantial capital investment

-Focus on short-term profits, not long-term holdings

-Frequent, high-volume trading activity

-Use of derivative instruments

-Active trading strategies with risk management

-Formal business operations (e.g., registration, business plan, dedicated workspace, detailed record-keeping).

If these criteria largely apply, you may be considered a trader. If unsure, seeking advice from a crypto tax specialist is recommended.

Tax implications for traders/crypto businesses

Crypto traders are taxed similarly to other crypto businesses. This can involve income tax, and potentially Corporation Tax, Stamp Duty, VAT, and National Insurance contributions. Due to the complexities, consulting a crypto tax expert is a seriously good idea.

Trader vs. investor: Can you be both?

Yes, you can be both. However, maintain separate wallets to minimise transaction overlap between trading and investment activities. You can also be a crypto trader and a stock market investor, or vice versa.

Understanding cryptocurrency trader taxation

A crypto trader is generally treated as a sole trader for tax purposes. Profits are considered trading income, and expenses are tax-deductible.

Year-end calculations involve tallying income, expenses, and portfolio value changes. Profits are subject to relevant business taxes and added to overall taxable income. Losses may be deductible from other income.

Benefits of trader status

Here’s what you need to know:

-Small business tax incentives may apply.

-Eligible expenses (hardware, software, fees) can be deducted.

-Potential for asset write-offs.

Drawbacks of trader status

-Self-employed traders pay National Insurance on profits, in addition to Income Tax.

-High income can lead to a significant tax burden.

-Increased scrutiny from HMRC is possible.

-More complex record-keeping and compliance are required.

-Staying updated on evolving crypto tax regulations is essential.

Sole Trader Status and VAT

If classified as a crypto trader and earning over £1,000 annually, you'll need to register as a sole trader. VAT treatment of crypto is specific. These rules are subject to change, so keeping an eye on the HMRC website is a good idea.

If you receive crypto in exchange for goods or services, VAT will be due as normal. For other types of crypto transactions, for example buying/selling cryptoassets, VAT is generally not applied.

Taxation of crypto mining

Income from crypto mining is taxable. If mining is conducted as a business (formal setup, business plan, etc.), mined crypto is income (valued in GBP at the time of mining) and added to trading stock.

Sales, trades, and staking income are also taxable, and National Insurance contributions are required. Business expenses like hardware depreciation and electricity costs are deductible.

Taxing loans, staking, and other crypto business income

Any crypto income or expenses within a business context must be reported in GBP. The tax treatment of specific activities (e.g., loans, staking) may vary, so individual assessment is necessary.

Paying employees in cryptocurrency

Paying employees in crypto is treated like regular wages. PAYE obligations apply based on the GBP value of the crypto on the payment date. Similarly, receiving a salary in crypto is considered PAYE income, with its GBP value on the receipt date added to taxable income. Subsequent sales or trades are treated as capital gains events.

Reporting your tax

The UK tax year is from April 6 to April 5. Include all crypto transactions within this period on your tax return. Deadlines vary for paper and online returns. Meeting deadlines is crucial to avoid penalties.

Essential records to keep

Maintain detailed records of all crypto transactions, including:

-Transaction dates -GBP value at the time of the transaction -Transaction purpose -Counterparty details (e.g., wallet address)

Also, keep evidence of:

-Purchase/transfer receipts

-Asset totals

-Exchange records

-Agent / accountant / legal invoices

-Wallet records/keys

-Tax management software costs

Managing transaction records

For frequent traders, record-keeping can be challenging. CoinJar offers tax statements to help:

-Log in to your account

-Go to Settings > General > Reports > Export

-Export account statements, purchase/sale records, and deposit/withdrawal records for specific date ranges.

Tax for Crypto Traders and Businesses

Maintaining records of all transactions and seeking advice from a crypto tax specialist can significantly ease the burden of compliance. Tools like CoinJar’s tax statements can also streamline the process for frequent traders.