Have you tried investing in cryptocurrency before, or is it completely new? Maybe you’re just curious about it? Regardless of where you stand, it’s crucial to know how HMRC taxes cryptocurrencies. If you don’t have the time to go through all of HMRC’s guidelines, our guide has covered all the essentials of paying tax on crypto UK. Let’s dive in!
What is the Crypto Tax UK?
For crypto capital gains over the £3,000 tax-free allowance, you’ll pay 10% or 20% tax. For additional crypto income over the personal allowance, taxes range from 20% to 45%. The amount depends on the transaction, applicable tax, and Income Tax band.
Why Is There a Crypto Tax?
Legal Recognition and Financial Regulation
Cryptocurrency taxation gives legal recognition and enforces financial regulation. This helps legitimise and monitor digital currencies in the economic system.
Revenue Generation for Governments
Taxing cryptocurrencies helps governments raise revenue from this expanding sector, which can be used to fund public services and infrastructure.
Equity and Fairness in Taxation
Implementing a crypto tax ensures that income from digital assets is taxed fairly. This prevents tax evasion and helps maintain a balanced tax system.
Do You Have to Pay Taxes on Crypto?
Yes, for most investors. There are some exceptions though. Crypto assets aren’t seen as money or currency by key financial institutions. Tax-wise, crypto assets are treated like shares and taxed accordingly. Crypto traders and investors must understand all types of transactions, from essential buys and sells to hard forks, airdrops, staking, and more. The crypto industry is growing fast, making tax rules more complex. New cryptocurrency gaming and gambling platforms, as well as hybrid tokens, have altered the asset class. If you are not a UK tax resident or do not have a domicile in the UK, you may get more favourable tax rules.
How Do Cryptocurrency Taxes Work?
Taxable Events, Capital Gains Tax, and Income Tax
In cryptocurrency, taxable events include selling crypto for fiat, trading one crypto for another, and using crypto to buy goods or services. Profits from these activities are subject to capital gains tax, while earnings from activities like crypto mining or staking are subject to income tax.
Calculation of Taxable Income and Capital Gains
Determine the fair market value of the cryptocurrency at each transaction. Subtract the purchase price (cost basis) from the sale price to find the capital gain or loss. Report these figures on your tax return.
Compliance with Tax Authorities
Keep detailed records of all cryptocurrency transactions, including dates, amounts, and values. Use reliable software or consult a tax professional to report and pay taxes accurately. This helps avoid penalties and legal issues.
How To Report Crypto On Taxes
In the UK, reporting crypto taxes is part of the annual self-assessment process. The deadline for filing and paying is midnight on 31st January. The UK tax year runs from 6th April to 5th April of the following year. Filing opens at the start of the new tax year, giving you ample time to prepare and file before the deadline.
Combine capital gains and losses from crypto with other sources, such as property and shares. Report these on the Tax Return using the Capital Gains Summary SA108 supplementary pages. Report miscellaneous income from crypto as “Other taxable income” in Box 17 of the SA100 Tax Return form. If applicable, any allowable expenses, including the trading allowance, can be reported in Box 18.
In rare cases where an individual’s crypto activity is classified as financial trading, it should be reported on the Self-Employment pages of the tax return.
How To Determine Crypto Gain Or Loss?
To determine your crypto gain or loss, subtract your cost basis from the asset’s sale price. Calculate capital gains whenever you sell, swap, spend, or gift crypto (in some countries). Different countries use different cost-basis methods. In the UK, the “Share Pooling” method averages the cost of multiple purchases of the same asset over time. Pool your crypto purchases and pay tax on gains relative to their pooled cost. Keep accurate records of each transaction, including purchase, s, and dates. Proper record-keeping and understanding the cost basis method will help you comply with UK tax regulations and avoid issues during crypto tax reporting.
When and Why Paying Tax On Crypto UK?
Buying and Selling Crypto
If you sell your crypto for more than you bought it, you’ll likely pay Capital Gains Tax on the profit. If you lose money through trading, those losses could reduce your CGT bill. Swapping cryptocurrencies will also trigger a capital gains taxable event as you are selling crypto to other crypto investors or liquidity pools. If you trade large amounts of crypto or are in exceptional circumstances, HMRC may consider you a professional trader and ask you to pay Income Tax on selling instead of CGT.
Paid in Crypto
No matter which cryptocurrency you receive or who pays you, you must pay income tax and national insurance contributions. Payments in cryptocurrency are treated as regular income based on the market value when you receive them.
Crypto You Inherit
HMRC treats cryptocurrency as property under UK tax law. Inheritance tax will apply just as it would for any other asset, calculated based on the cryptocurrency’s fair market value at the date of death.
Mining and Validating
Mining as a Business
If mining is considered a business, the income will be added to trading profits and taxed. When you sell cryptocurrency, any gain from when it was mined will be added to your trading profits. This transaction may also be subject to NI contributions.
Mining as a Hobby
If your mining activities are a hobby, declare any income as miscellaneous income on your tax return. Use the fair market value of the crypto at the time you receive it. Add any rewards or fees from mining to your taxable income. You can deduct reasonable expenses before adding to the taxable income. Crypto is subject to CGT when you dispose of it.
Staking
According to HMRC, the GBP value of any tokens awarded at the time of receipt will be taxable as miscellaneous income with any reasonable expenses reducing the chargeable amount. Individuals may want to treat it as savings income and utilise relevant allowances to reduce their tax bill.
How to Lower Crypto Tax Legally
1. Crypto Tax Loss Harvesting
Crypto tax loss harvesting means selling assets at a loss to reduce your capital gains and lower your tax bill. Make sure to do this before the tax year ends.
2. Use HIFO/TokenTax Minimisation Accounting
HIFO (highest in, first out) accounting is a specific ID accounting method. It sells your tax lots with the highest cost bases first. This approach lowers your tax bill by focusing on assets that generate the smallest taxable gain. Under UK IFRS, we can only use either FIFO or AVCO. FIFO stands for first in, first out, and AVCO stands for the average cost of the units. HIFO is not an accepted principle.
3. Donate Your Crypto and Give Cryptocurrency Gifts
Crypto donations and gifts to HMRC-recognised non-profits or charities are not subject to capital gains taxes. In some cases, they are also eligible for tax relief. This can help reduce your tax burden while supporting causes you care about.
4. Simply Don’t Sell Your Crypto
To avoid taxes on your crypto, simply hold it. If you need cash, use your crypto as collateral to borrow. This isn’t a taxable event, so you can access funds without triggering a tax liability.
FAQs
What happens if you don’t report your crypto taxes?
Failing to report your crypto taxes can have serious consequences. HMRC can track crypto transactions through exchanges and international tax treaties. You could face penalties, interest charges, and even criminal prosecution if you underreport or fail to report your crypto activities. The penalties for non-compliance can be much higher than the tax owed. To avoid these issues, it’s crucial to keep accurate records of all your cryptocurrency transactions and ensure full compliance when filing your tax return.
Is sending crypto to another wallet taxable?
Sending cryptocurrency between wallets you own is not taxable. This includes moving crypto between your exchange wallet and personal wallet. Ownership does not change, so there’s no sale or disposal to tax. Keep detailed records of these transfers to prove ownership if needed. Note that transaction fees during these transfers could be taxable, as they are a disposal of crypto assets.
Do you need to pay income tax on cryptocurrency?
Yes, you need to pay income tax on cryptocurrency if you receive it as payment for goods or services, through mining, staking, or as rewards. The value of the cryptocurrency when you receive it is taxable income and must be included in your self assessment tax return under miscellaneous income. If you get airdrops or hard forks with monetary value, they are also subject to income tax. Report the fair market value of the cryptocurrency at the time you receive it and keep records of all transactions to comply with tax regulations.
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