What you need to know about UK cryptocurrency taxes
An overview of UK cryptocurrency taxation
Have you ever dealt with cryptocurrency before? Or would you consider it a new experience for you? Is investing in cryptocurrency just something you’re intrigued by?
Regardless of your situation, it’s important to understand how HMRC taxes cryptocurrency and bitcoin before moving forward.
In this article, we’ll explain everything you need to know about cryptocurrency taxes in the UK.
Our comprehensive outline to UK cryptocurrency taxes offers a closer look at everything you need to know about cryptocurrency taxes if you don’t have time to read HMRC’s full guidance.
Cryptocurrency taxes: do you have to pay them?
Sadly, yes – for most crypto investors. There are some exceptions to the rules, however.
The key financial institutions do not view crypto assets as money or currency. To the extent taxation is concerned, crypto assets are taxed like shares.
Although crypto trading has a reputation for being underhanded, tax regulators will closely monitor legitimate crypto investments.
A crypto trader or investor needs to be aware of the many transactions available, including basic purchases and sales to hard forks, airdrops, and stakes.
Due to the rapid development of the crypto industry, the tax position has become more complex.
Various unique and complex cryptocurrency platforms, such as gaming and gambling platforms, and non-fungible tokens and hybrid tokens for specific use cases, have transformed the asset class.
As long as you are not a UK resident or have no domicile in the UK, you will be subject to the tax rules that are more favourable to non-UK taxpayers.
There are some tax advantages that you can take advantage of if you are not a UK tax resident or if you do not have a domicile in the UK.
Cryptocurrency taxes: When do you pay them?
A number of activities related to cryptocurrency are taxed, including:
The buying and selling of crypto
- You will likely have to pay capital gains tax on the profit you made when you sold your crypto.
- You could minimise your capital gains tax bill if you lost money through trading. You will also need to keep in mind that swapping cryptocurrencies will trigger a taxable event, since you will be selling the crypto to other investors or liquidity pools.
- In the event that you trade substantial amounts of crypto or anything else that would be considered an ‘exceptional circumstance’, HMRC will treat you as a trader and require you to pay income tax on your trading rather than capital gains tax.
Receiving payment in crypto
- In addition to income tax, you’ll have to pay national insurance contributions no matter what cryptocurrency you’re paid in.
- Under UK tax law, cryptocurrency is treated as property by HMRC. Thus, inheritance tax planning should also be considered since they will also be subject to inheritance tax.
Mining and validating cryptocurrency
Cryptocurrency mining will either be considered a hobby or a full-fledged business.
A number of factors will play a role in this:
- Degree of activity
Mining cryptocurrency as a business
The mining income will be added to trading profits and subject to income tax deductions if your mining activity is considered a business.
Should you dispose of a cryptocurrency, any gain in value from the acquisition time will be added to your trading profits, and you may be required to pay NICs.
Mining cryptocurrency as a hobby
You must declare any income derived from mining activities when filing your tax return as miscellaneous income if they qualify as a hobby. This will will be the fair market version of the value of the cryptocurrency at the time you received it.
Your taxable income will also include any rewards or fees you receive in exchange for mining activities.
Before adding the income to your taxable income, you may be able to deduct reasonable expenses. This cryptocurrency will, however, be subject to capital gains taxes when you dispose of it.
HMRC states that the GBP value of any tokens awarded at the time of receipt will be taxable as income (miscellaneous income) with any reasonable expenses reducing the chargeable amount.
If you wish to reduce your taxes further, you may wish to treat this as savings income and claim your personal savings allowance. Should you be considering this option, we recommend speaking with a tax accountant.
It is important to keep in mind that capital gains tax may apply if you dispose of it at a later date.
Crypto/crypto gain taxes: how much do you pay?
Cryptocurrency buyers, sellers, and receivers generally have to pay income tax through a trade.
The most obvious example is a ‘day trader,’ who buys and sells crypto assets to make short term profit.
Trading on one’s own account, however, is unlikely to qualify as ‘trading’ for income tax purposes. As a result, individuals are likely to be considered as capital gains taxpayers.
In order to be considered as ‘trading’, you must buy and sell crypto assets with such intention, sophistication, frequency, and level of organization that the activity amounts to a financial trade.
In England, Wales and Northern Ireland, crypto income will count towards your income tax bracket ranging from 0% to 45%, or if you’re in Scotland – which has two additional bands – 19% starter rate and 21% intermediate rate.
Capital gains tax
The majority of people who try to buy, hold, or sell cryptocurrency on their own accounts are considered to be carrying out investment activity and are subject to capital gains tax.
The disposal of cryptocurrency assets will result in a taxable event, with the proceeds of the disposal being matched against the purchases in the following order:
- Crypto assets acquired on the same day
- Crypto assets acquired in the following 30 days
- The average cost of any unmatched crypto assets (‘the pool’)
The capital gains tax is levied on all gains above the annual tax-free allowance of £12,300 for individuals. The basic rate tax band (if available) applies to any gains up to this allowance, while gains at higher and additional tax rates are taxed at 20%.
Is it possible to avoid paying taxes on crypto assets?
In some circumstances, individuals may not be required to pay tax on crypto.
Income tax will not be applied to airdropped crypto if:
There will be no income tax applied to airdropped crypto if:
- If airdropped crypto isn’t accepted in trades or businesses involving cryptocurrency
- Receiving them without doing anything in return
The airdrops received in return for performing a service will, however, be subject to income tax and classified as miscellaneous income or trading profits (if you are a business).
In the event that a crypto trader or business receives an airdrop, any increase in the value of the crypto will be added to the trading profits and become subject to income tax as well as NICs. In contrast, if an individual receives an airdrop, he or she will be subject to capital gains tax at the time of disposal.
In the United Kingdom, the following crypto transactions are not subject to capital gains tax or income tax:
- Gifting crypto to your husband or wife
- Transferring crypto between your own crypto wallets
- Purchasing crypto with fiat currency, e.g., GBP
- holding your crypto for as long as you possibly can (i.e hodl’ing)
Crypto Taxes: How to pay
You need to report gains on cryptocurrency on your self-assessment tax return – or you can use HMRC’s real-time capital gains tax reporting service.
Crypto investors need to keep accurate records for tax purposes.
According to HRMC, crypto investors must declare the following information:
- The type of tokens
- The date you disposed of the tokens
- The quantity of tokens you’ve disposed of
- The quantity of tokens you have remaining
- The value of the tokens in GBP
- Bank statements and wallet addresses
- Records of the pooled costs before and after you disposed of them
HMRC’s nudge letters regarding cryptocurrency
Holders of crypto assets, such as Bitcoin, have received nudge letters from HMRC reminding them of their responsibilities to report their income or gains through a self-assessment tax return.
As well as reminding them that transactions need to be reported, it also serves as a reminder to register for self-assessment.
In the case that you received a nudge letter and purchased cryptocurrencies in 2020/21 or earlier but have not yet sold any, you need not take any action.
It is important to check whether you have made a taxable gain or loss if you sold cryptocurrency in 2020/21, as this must be reported on your self-assessment tax return.
Does HMRC have any information regarding the crypto assets you own?
Crypto exchanges have been requested to provide HMRC with data for many years.
In August 2019, eToro, Coinbase, and CEX.IO received letters from HRMC requesting their customer data and transaction history.
A HMRC spokesperson confirmed to The Block “We want to help people get their tax affairs right and believe that taxpayers want to get it right…HMRC regularly gathers data from a range of information sources using powers provided by Parliament. Data collected by HMRC is used to improve the integrity of the tax system and to identify those that have failed to declare their gains.”
How to report capital gains and losses on your personal tax return
Reporting your capital gains and losses on your tax return is important. There are two ways in which losses can be utilised. The first method involves offsetting any losses against any gains realised in the same tax year, thereby reducing your potential tax liability. Secondly, losses can also be carried forward and offset against future gains to reduce your tax bill.
When is the deadline for submitting your Tax return for UK Cryptocurrency Taxes?
A self-assessment tax return must be filed by the 31st January 2022 if you purchased or sold cryptocurrency between 6 April 2020 and 5 April 2021.
Crypto transactions should be meticulously recorded throughout the year and HMRC should be notified of any capital gains profits or losses, as well as any crypto earnings perceived as income.
After submitting your tax return, HMRC will calculate whether you owe any tax. If you owe any taxes, you will need to pay them by midnight on the 31st January 2022, which is why you should submit your tax return as early as possible.
We can assist you with your personal taxes
A self-assessment tax return must be submitted by the deadline, which can be time-consuming and stressful.
If you do not file self-assessment tax return on time you will immediately face a late penalty of £100, with additional penalties increasing as time passes.
In addition to calculating your tax liability and completing the relevant forms, our Personal Tax team will verify and submit your tax return to HMRC on your behalf.
To determine the best course of action for your particular situation, we offer a complimentary initial consultation. The meeting can be conducted in person or via phone or video call, as you prefer.
Please contact us on +44 (0) 207 205 2186 or fill out the brief form on our website to enlist our assistance.