I put Â£ 5,000 in bitcoin in September 2019 and more recently bought a dogecoin. I understand that I may have to pay both income tax and capital gains tax. Is it true? If so, what steps should I take to determine my tax liability?
Matthew Watkins, Tax Director of the accounting and business consulting firm BDO, says it is a myth that the disposal of crypto assets does not fall within the scope of UK taxation on the grounds that the profits or winnings therefrom are akin to gambling or lottery type winnings . It’s not correct.
HM Revenue & Customs issued guidelines in December 2019 explaining their take on how these transactions should be taxed. For individuals, anyone selling crypto-assets will be subject to Capital Gains Tax (CGT) on their profits, and this will need to be declared on their self-assessment tax return.
If you do not file income tax returns, you must register with HMRC. The deadline for doing this is six months from the end of the tax year concerned, so before October 6, 2021 for the current tax year.
In certain circumstances, the HMRC may consider an individual’s activities in buying and selling crypto assets to constitute âtradingâ. This is where the frequency, level of organization and sophistication are such that the activity is akin to a profession.
For UK tax purposes, profits from a transaction will be subject to income tax, not CGT. However, it is rare for individuals to trade in cryptoassets. If you are unsure of the correct UK tax treatment, you should seek advice from HMRC on your particular situation.
Given that your initial investment was made in September 2019, the value has likely increased significantly following the surge in popularity over the past year. However, what matters from a UK tax perspective is how much you earn when cryptoassets are sold, not how much you have invested so far.
This is important because it looks like you are still holding bitcoin and dogecoin. If there has been no assignment, no tax is due. If, on the other hand, you had traded bitcoin for dogecoin, that would be an assignment of bitcoin for UK tax purposes and CGT would occur.
You have a tax-free allowance of Â£ 12,300 in the current 2020-21 tax year, which could be used to reduce the CGT due. Any additional gain will then be taxed at 10% or 20%, depending on the level of your other income.
You should be careful when calculating the gains resulting from the sale of cryptoassets. HMRC receives information from crypto exchanges and will prosecute those who do not correctly report their profits.
How can I best pay off part of my mortgage?
I saved some money last year and want to use it to pay off more of my mortgage. My lender asks me if I want to do this as a “principal payment” which means that the interest I pay will go down immediately and my monthly payments will be smaller, or as an “overpayment” which means that the interest decreases, but the monthly payments remain the same. Are there any considerations I should take into account before deciding?
Owrang Rahmani, Financial Planner at Credius Wealth, says paying off a mortgage and living in a property you own, debt-free, is a life goal for many of us. By using your savings to pay off part of your mortgage, you are making a prudent financial choice that will get you one step closer to that goal.
A âreturn of capitalâ tends to be used to mean a one-time payment, say Â£ 2,000, that immediately reduces your loan balance. Your new lower mortgage balance would then be used to recalculate your monthly payments, which would be reduced accordingly.
An ‘overpayment’ is used to refer to regular monthly payments to reduce the principal balance, for example by increasing your direct debit by Â£ 100 per month. The overpayment does not affect your monthly payments: you can choose to keep your monthly payments the same and use the interest savings to shorten the term of your mortgage.
Don’t worry too much about the terminology, as different lenders tend to use different terms. Either way, you reduce the amount of your mortgage and the amount of interest you pay.
There are pros and cons to each option. In general, by reducing your monthly payments, you will instantly see an improvement in your cash flow and have more money available for general expenses or savings. This can be useful if you think your mortgage payments are currently higher than you would like or want to be able to save more for future purchases, planning for retirement, or on a rainy day.
If you choose to shorten the term of your mortgage instead of lowering your monthly payments, the overall benefit is not just the immediate interest savings, but your compound interest savings over time. These can be important. As a result, you could be discharged from your mortgage much sooner than expected.
Overall, if you are comfortable with your current mortgage payments and find them affordable over the long term, reducing your mortgage term is the best solution.
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With that said, my advice would always be to undertake a full financial review of your situation before making any significant changes, as you may benefit from other options.
These may include the contribution of your lump sum to a pension; pay off other non-mortgage debt first at higher interest rates; build up an emergency fund; or using lower monthly mortgage payments to create a budget to pay for insurance to mitigate or better eliminate the risk to you and your family of losing your home in the event of unforeseen illness, disability or premature death.
The opinions contained 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 results of reliance on responses, including any loss, and exclude all liability to the greatest extent possible.
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