CRYPTOCURRENCY investors need to check the rules before they pocket any profits or risk a hefty tax bill.

It comes as one worried investor turned to Reddit to ask for guidance on their investment.

The user posed a hypothetical scenario, saying they had bought cryptocurrency worth around £13,000 and made a profit of £300.

They then asked, if they had withdrawn the full amount of £13,300, whether this would need to be reported to HMRC.

The poster was worried about inadvertently getting a fine by not declaring something they should, adding that it was their first time doing a self-assessment tax return.

They said: "My understanding is that I'd only report it if the profit I made was over £12,300."

They said that since their profit had been just £300, that even though they had sold £13,300 worth of crypto, they wouldn't need to report it as £13,000 of that amount was their investment and not profit.

So what are the rules when it comes to declaring crypto?

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The tax the user was concerned about is Capital Gains Tax (CGT).

This is a tax you pay on the profits you've made when you sell an asset such as an investment or a property which is not your primary residence.

You get a CGT allowance each tax year – it's currently £12,300.

That means you can make £12,300 of profit on certain assets before you have to pay the tax.

So, if you made £15,000 profit, you would pay tax on the bit above the allowance – £2,700.

That would be a tax bill of £270 for a basic rate taxpayer, and £540 for a higher rate taxpayer.

You can check how much you'll pay using an online tax calculator.

However, tax is incredibly complicated and it can be worth getting an expert to help if you're at all in doubt.

If you get it wrong or don't declare tax when you should, you're liable for a fine from HMRC or even prosecution.

However, the rules can be a little more complicated for cryptocurrency such as Bitcoin.

And if your full-time job is trading crypto, there may also be income tax considerations to bear in mind.

Laith Khalaf, head of investment analysis at AJ Bell, said: "Plenty of people will be sitting on some tidy gains from crypto holdings, but they probably haven’t thought about the tax implications.

"Crypto gains are potentially liable to CGT so crypto fans need to formulate a bit of a plan to help minimise their tax liabilities.

"No doubt some people will be tempted to think there’s no way HMRC will ever find out about their crypto profits, but a fine and prosecution lie in wait if they don’t pay the necessary taxes.”

Do you need to pay tax on your profits?

According to gov.uk, it's not just about your overall profit either – you'll need to work out your gain for each transaction you make.

The way you work this out is a bit different if you sell tokens within 30 days of buying them too.

You can, however, deduct certain costs such as transaction fees paid before your transaction is added to a blockchain.

Investors must keep records for each transaction they make including the type of crypto token, the number of tokens you sold, and the value of those tokens in pound sterling.

If your total taxable gain is above the annual allowance, you'll have to report your profits and pay CGT.

You do this either by completing a self-assessment tax return at the end of the tax year, or by using the real time CGT service where you can report the gain straight away.

There are plenty of risks to be aware of if you're considering putting your money into any cryptocurrency.

One trader recently told how he lost half a million pounds investing in bitcoin.

Cryptocurrencies are not regulated and that means if something goes wrong your money is not protected and you won't get compensation.

They're also incredibly volatile and can see sharp swings up and down in price.

In October 2020, the FCA banned Brits from buying a "harmful" type of cryptocurrency-related investment in the UK known as an exchange traded note.

But people can still continue to buy cryptocurrencies directly and invest them or use them as currency.

Some experts have predicted a Bitcoin crash is on its way in 2022.

The risks of buying with cryptocurrencies

Investing and making a purchase in cryptocurrencies such as Bitcoin is risky .

Their value is highly volatile and City watchdog the Financial Conduct Authority has warned investors should be prepared to lose all their money.

Investing in cryptocurrencies is not a guaranteed way to make money.

You should also think carefully about making purchases with a cryptocurrency.

For example, Bitcoin has had wild price fluctuations in recent months and the price can change on an almost hourly basis.

The price of a Bitcoin was at $40,258 on January 9, according to Coindesk, but fell to $34,214 just three days later.

That's a 15% drop.

These price swings are risky for a business as you could sell an item for a Bitcoin at one price and the value may drop soon after, leaving you with less money from a sale.

Similarly, the price of Bitcoin has soared by more than 21% since the start of this week so it can be hard for a shopper to get an accurate idea of the price of an item if its value changes on a daily basis.

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