Cryptocurrency

Do I need to pay tax on cryptocurrency holdings?

I put £5,000 into bitcoin in September 2019 and more recently I purchased a dogecoin. I understand that I may need to pay both income tax and capital gains tax. Is this true? If so, what steps do I need to take to ascertain my tax liability?

Matthew Watkins, tax director at accountancy and business advisory firm BDO, says it is a myth that the disposal of cryptoassets falls outside the scope of UK taxation on the basis that the profit or gains arising from it are akin to gambling or lottery type winnings. This is not correct. 

HM Revenue & Customs published guidance in December 2019 explaining its view on how these transactions ought to be taxed. For individuals, anyone selling cryptoassets will be subject to capital gains tax (CGT) on their profits, and this will need to be reported on their self-assessment tax return.

If you do not file tax returns then you must register with HMRC. The deadline for doing so is six months from the end of the relevant tax year, so before October 6 2021 for the current tax year.

There will be some circumstances where HMRC may take the view that the individual’s activities in buying and selling cryptoassets constitutes “trading”. This will be where the frequency, level of organisation and sophistication are such that the activity amounts to a trade.

Matthew Watkins, tax director at BDO

For UK tax purposes, profits from a trade will be subject to income tax, not CGT. However, it is rare for individuals to be seen to be trading in cryptoassets. If you are unsure about the correct UK tax treatment you should obtain advice from HMRC on your specific circumstances.

Given that your initial investment was made in September 2019, the value is likely to have increased significantly following the surge in popularity over the past year or so. However, what matters from a UK tax perspective are the gains you make when the cryptoassets are sold, not the amount you’ve invested so far.

This is important as it appears that you still hold bitcoin and dogecoin. If there has been no disposal there is no tax due. If, on the other hand you had exchanged bitcoin for dogecoin, this would be a disposal of bitcoin for UK tax purposes and CGT would arise.

You have a tax-free allowance of £12,300 during the current 2020-21 tax year, which could be used to reduce CGT owed. Any additional gain will then be taxed at either 10 or 20 per cent, depending on the level of your other income. 

You need to be careful when calculating the gains arising from the sale of cryptoassets. HMRC receives information from crypto exchanges and will pursue those who fail to report their profits correctly.

How best can I pay off part of my mortgage?

I saved money last year and want to use it to pay off more of my mortgage. My lender is asking if I want to do this as a “capital payment”, which means the interest I pay will go down immediately and my monthly payments will be smaller, or as an “overpayment”, which means the interest goes down, but the monthly payments stay the same. Are there considerations I need to take into account before I decide? 

Owrang Rahmani, financial planner at Credius Wealth

Owrang Rahmani, financial planner at Credius Wealth, says repaying a mortgage and living in a property you own, debt free, is a life goal for many of us. In using your savings to repay part your mortgage, you are making a prudent financial choice that will get you a step closer to achieving that goal.

A “capital repayment” tends to be used to refer to a one-off payment, of say £2,000, that reduces your loan balance immediately. Your new lower mortgage balance would then be used to recalculate your monthly payments, which would be reduced as a result. 

An “overpayment” is used to refer to regular monthly payments to reduce the capital balance, for example, increasing your direct debit by £100 per month. The overpayment does not have to affect your monthly payments: you can choose to keep your monthly payments the same and use the interest saving to shorten the term of your mortgage. 

Do not worry too much about the terminology as different lenders tend to use different terms. In both cases, you are reducing the size of your mortgage loan and the amount of interest you pay.

There are advantages and disadvantages to either option. In general, by reducing your monthly payments you will instantly see an improvement in your cash flow and you will have more money available for general expenditure or savings. This can be helpful if you feel your mortgage payments are currently higher than you would like or you would like to be able to put more aside for future purchases, retirement planning or a rainy day. 

If you choose to reduce the term of your mortgage instead of reducing your monthly payments, the overarching benefit is not just the immediate interest saving, but your compounded interest savings over time. These can be significant. As a result, you could be mortgage-free much earlier than you had originally planned.

Overall, if you are comfortable with your current mortgage payments and feel they are affordable over the long term, reducing the term of your mortgage is the more beneficial course of action.

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That said, my advice would always be to undertake a full financial review of your circumstances before making any significant changes, as you may benefit from other options.

These can include contributing your lump sum into a pension; paying off other non-mortgage debts first at higher interest rates; building up an emergency fund; or using lower monthly mortgage payments to create a budget to pay for insurance to mitigate, or better eliminate, the risks to you and your family of losing your home in case of unforeseen illness, incapacity or premature death. 

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to money@ft.com.

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