Cryptocurrencies have shaken up the investment world, providing a way for almost anyone to get involved in asset trading, often for a very low cost. Some win, some lose, but all traders get a chance to make money from this new market that is full of opportunity. However, as something completely new, the consequences of trading cryptocurrency is not always clear, especially where tax liability is concerned.
Making money is great of course, but it comes with some responsibilities, and ensuring you stay within your local tax laws is one of them. As a business income, your trading profits are a taxable event, so it is important to understand your local tax laws and how they apply to your gains and losses in the digital currency.
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We are going to guide you through those obligations in individual countries, so when you invest in cryptocurrencies and make this tax year, you know where you are legally.
Cryptocurrency Taxes in the UK
We start with the UK, where virtual currency trading is extremely popular, the taxation situation is, as with all UK taxation, more complex than many, and your tax liabilities depend on your exact circumstances. You do not have to pay tax on cryptocurrency assets in the UK until you sell them, and the difference between the buy and sell price is the profit, only that is taxed.
Tax as a cryptocurrency investor
Unless you declare yourself as a full-time trader to the tax authorities, HMRC, then you are considered an investor in Bitcoin, Ethereum or whichever digital currency you trade. As an investor, your profits are subject to capital gains tax, however, there are some limitations.
You get a tax-free allowance for capital gains, at the time of writing this is £11,700 per year, that means if your profits are less than that allowance, you do not have to pay any tax or even report the income to HMRC. That is unless you sell a virtual currency value of more than 4 times that allowance in a single year, even if you don’t make enough profit to exceed the limit, you must report your cryptocurrency trading activities to HMRC.
If you are married, remember that both yourself and your spouse are entitled to that £11,700 allowance and that you can gift cryptocurrency tax-free. In this way, if you are careful and plan ahead, you can gift your spouse digital currency through the year to sell, and then have £23,400 in tax-free profits.
If you exceed the allowance, you must declare that income to HMRC, so it is crucial you keep accurate records of all your cryptocurrency trading. Remember, convert all values into GBP at each trade so that your calculations are correct. If you leave it until later, the conversion rate may be different and that can mean paying more than you should.
If you are a frequent trader who makes a lot of trades during the year, it is wise to seek help from a tax professional, who can guide you through the process and assess whether you need to register as a trader in the eyes of HMRC. That is not straightforward, as the badged of trade used to assess whether you are an investor or trader are open to interpretation. In general, investors tend to keep hold of assets long-term, and less frequent buying and selling, however, a tax professional will help you define which side of the trader or investor divide you are on.
Tax as a Trader
If you trade enough to be considered a full-time professional trader, then you will be seen by the tax authorities as a sole trader business. Again, records must be kept and if it’s your only job, you still get a tax-free allowance of £11,700. However, in this case, you are subject to income tax, rather than capital gains tax, and no matter how much you earn, you must report your financial activity, with fines for late reporting. Currently, the rates for capital gains stand at 18% and 28% depending on total earnings, and this can represent a significantly lower level than the equivalent income tax rate you would pay as a trader, so maintaining investor status can be beneficial wherever possible.
In this situation, a tax professional is the very best way to ensure you stay the right side of the law.
Cryptocurrency Taxes in Ireland
One of the most cryptocurrency friendly countries in the world, Ireland even has its own digital currency, the Irishcoin, it’s even accepted in a small but growing number of pubs and hotels around the country.
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Taxation as an investor
In Ireland, investment in cryptocurrencies is viewed as an investment in any asset, that is, if you may a profit when you sell it, you must declare it and pay capital gains tax. As with most countries, there is a tax-free allowance, in this case, it is €1,270 if your annual profit is below that you don’t pay any tax but are still required to declare the earnings.
Taxation as a Trader
As with the UK, a trader is classed as a business and will mean paying income tax on profits and more stringent requirements for declaring income. In Ireland, Capital Gains Tax rates are 33%, while income tax can reach as high as 52%, so again, seek professional tax guidance to ensure you are maintaining the best approach for your needs.
Taxation in France
While the UK and Ireland are somewhat similar in their approach, France has been taking a somewhat different approach. Until recently, profits from the sale of cryptocurrencies were viewed legally as ‘Industrial and Commercial profits’, attracting up to a 45% tax rate for higher earners.
However, earlier in 2018 this was changed, reclassifying profits from investing in cryptocurrencies as ‘moveable property’ instead, which results in a capital gains tax flat rate of 19%. In addition to that, as with previous tax rates, there is a generalized social contribution (CSG) of 17.2 percent that is paid on all income, however, this represents one of the easiest tax situations to deal with.
In all cases, records must be accurately kept, and income declared of course, and again for those that are very frequent traders, a tax professional may be useful to keep everything organized for you.
Taxation is Important, don’t ignore it
Taxation is a fact of life, and we must all make sure we follow our local rules. As you can see here, there can be differences, some, such as the UK, are particularly complex, while others, as with the new approach in France, simplify things. However, wherever you are it is important to get it right, and so if you do trade high volumes, it can be a significant help to find a professional tax advisor to help you maintain the correct records.