Tax implications of earning in crypto

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Posted 2022 by Chris Davies

More and more we are hearing of people being paid in crypto either as employees or on a self-employed basis and they ask us the question “What’s my tax position?”

There are a number factors to consider some of which may surprise you. So let’s look at the position of an employee being paid under PAYE first.

PAYE and crypto payments

It’s the employer’s obligation to report the pay to HMRC and make the necessary deductions.

It’s not possible to report salaries to HMRC in terms of crypto so for the calculation of deductions everything has to be converted into £ sterling.

Tax and national insurance will be calculated on the £ sterling value and the employee is then paid the net amount in crypto.

Self-employed and crypto payments

Self-employed people will receive crypto for their services and will report the value of the crypto converted into £ sterling at the date of the transaction and be assessed to income tax under self-assessment on that amount.

Most people will see that as being fair and relatively easy to understand, but that’s not the end of it.

The value of crypto by its nature will rise and fall in comparison with £ sterling but as long as the crypto continues to be held there are no tax implications.

When is tax incurred?

However, when the crypto is spent, withdrawn or exchanged for another crypto there are capital gains tax implications.

Crypto wages and tax – a worked example

Let’s take the example of an employee who receives his net salary in bitcoin equivalent to £4,000. He holds that bitcoin but decides a month later that he needs a new car.

In that month the value of bitcoin has risen and now his bitcoin can acquire a car worth £6,000. Over the month he has made a gain of £2,000 and has realised that gain.

He therefore has to record that as a gain on his tax return and potentially pay capital gains tax on that gain.

But it’s not just large purchases. It equally applies to his daily purchase of his morning coffee and his lunch. Anywhere where he spends his crypto there is the potential for a gain or loss on the transaction.

One small comfort is that if the value of crypto falls and that loss is realised then losses can be offset against gains in the year, and unused losses can be carried forward against future gains.

As you can see good record keeping in these circumstances is essential to keep track of the transactions and most likely some of the apps on the market will be required.

Need a specialist crypto accountant?

If you have any questions on this matter or crypto taxation generally please do get in touch.

More information about our crypto tax services