Should I incorporate my crypto trading activities?

Should I incorporate my crypto trading business? As a firm of crypto specialist accountants, that is a question we are being asked more and more frequently. So how would we go about answering that?

Income tax or CGT on crypto trading?

Firstly a reminder that in HMRC eyes, individuals who hold crypto for investment, appreciation or to purchase goods will be subject to capital gains tax on gains over their annual CGT allowance.

In their opinion, only in exceptional cases would HMRC expect businesses to buy and sell crypto with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself and only in those exceptional cases would income tax treatment take priority over capital gains tax treatment.

Certain forms of income will be subject to income tax for example mining fees, staking and potentially airdrops.

Basic or higher-rate taxpayer?

Having established whether the income sources would be subject to income tax or capital gains tax we would then need to consider the individual’s personal tax situation ie are they a basic rate or higher rate taxpayer and what levels of income tax and/or capital gains tax they might be due to pay.

Income tax rates for individuals are 20%, 40% and 45% whilst capital gains tax rates are 10% or 20% on crypto gains. Companies pay tax on income and gains currently at 19% although the Government have announced that corporation tax is set to rise to 25% from April 2023.

If the activities simply consist of holding crypto for growth then it is unlikely that a company would be worthwhile. As corporation tax is currently 19% (soon to be 25%) and capital gains tax is at most 20% it doesn’t seem sensible to go to the expense of forming and running a company for tax saving purposes.

Companies are probably used most commonly where the individual is receiving income subject to income tax such as mining fees, staking income and potentially airdrops which would be subject to 40% or 45% income tax in the individual’s hands. By incorporating the business this income can be taxed at 19% (or soon to be 25%) within the company.

Although there may be further tax to pay when the individual withdraws the money from the company, if all he intends to do is keep the money in the company and reinvest further in crypto activities then the lower corporation tax rates are very attractive.

Finally a myth that we often hear is that VAT only applies to companies. That’s not correct. If a business is making taxable supplies and is obliged to register for VAT then whether it is an individual or a company makes no difference.

Hopefully that has given you an indication of the matters that we would consider. In summary:

• What is the nature of the income?
• What is the taxpayers personal tax position?
• What is the intention for the income or gains?

If you would like to speak to one of our crypto experts or obtain a quote for assistance with your crypto tax affairs please do get in touch via the contact form