A guide to staying tax compliant for UK crypto profits

Introduction

The rise of cryptocurrencies has introduced a new realm of financial opportunities for enthusiasts in the United Kingdom. As more and more embrace the digital currency revolution, the landscape of personal finance has undergone quite a transformation. However, along with the potential profits, crypto earnings also come with tax obligations. Understanding the tax implications of crypto earnings is crucial to ensure compliance with UK tax laws.

No matter how you’ve earned your crypto profits – be it investing, trading, mining, or staking, we’re here to help demystify any complexities surrounding crypto taxation. By understanding the principles and obligations associated with UK crypto taxation, you can confidently navigate the crypto tax landscape and stay on the right side of the law.

In this blog, we will explore the following:

• Why do people who earn Crypto owe it as tax?
• What is Capital Gains Tax and how does it impact Crypto earners?
• When do I pay the tax I owe on my cryptocurrency?
• How can I reduce the tax I pay on crypto?

If you are looking for some expert insight into the world of crypto tax, why not check out Andy Wood’s ebook – which provides up to date and in depth insight that you won’t find anywhere else. Alternatively, consider joining our community of like minded crypto tax degens as we navigate the complicated and ever changing world of crypto tax together.

Why are crypto profits subject to tax?

Cryptocurrencies like Bitcoin, Ethereum, and others are considered taxable assets in the UK.

Broadly, this means that the profits from buying and selling crypto will be taxable as well as other activities – such as staking and mining.

The precise treatment depends on the activity which could broadly be categorised as follows:

• Buying and selling crypto: Generally, these disposals of assets will be subject to capital gains rules (unless the activities are commercial and organised – then taxed as a trade)
• Staking (whether POS or DeFi): The return on investment will be taxable as income
• Crypto lending – the yield that one receives from a platform of liquidity pool is likely to be taxable income

Anything that one earns through, say P2E, will also likely to be subject to income tax (although the sale of in-game NFTS will, again, likely be subject to CGT).

If a business receives crypto instead of cash for goods or services, then this revenue is accounted for in the same manner as other receipts.

What is Capital Gains Tax?

Capital gains tax (CGT) applies when you sell, exchange, or dispose of your crypto for more than its original cost. CGT is calculated based on the gain (selling price minus the acquisition cost) and the individual’s annual exempt amount. The rate of CGT depends on your overall taxable income and can range from 10% to 20% for most individuals.

For the average crypto investor, their profits will fall within the CGT regime.

The capital gains rules also apply to companies, however, the capital gains are subject to corporation tax.

How are the income tax rules applied?

Some crypto profits will be subject to income tax instead.

Firstly, someone who buys and sell crypto on a commercial and organised basis may be treated as operating a trade. As such, the profits will be subject to income tax and National Insurance Contributions (“NICS”). However, this is exceptional.

In addition, those who are seeking a return on their investment, like ‘yield farmers’, will suffer income tax on the rewards they receive from a platform or liquidity pool. It is likely that, for most, this will be treated as Miscellaneous Income. However, in exceptional cases, where the person is trading, this might be deemed to be trading income.

Those engaged in mining activities, where as a hobby or as a trade, will also find their bounty subject to income tax aswell.

Those receiving rewards from P2E games or in the metaverse are also likely to find their swag subject to income taxes.

When do I pay the tax I owe on my cryptocurrency?

For capital gains tax on crypto profits, you have until the self-assessment deadline (31 January following the end of the tax year) to report and pay any tax due.

For income tax on crypto earnings, you must report the income and pay the tax by the self-assessment deadline, which is usually on or before January 31st following the end of the tax year in which the income was received. For capital gains tax on crypto profits, you have until the self-assessment deadline to report and pay any tax due.

How can I reduce the tax CGT I pay on crypto?

While you can’t avoid paying taxes on crypto earnings, there are legal strategies to help reduce your tax liability:

1. Utilise the Annual Exempt Amount

Each tax year, you have a tax-free allowance known as the annual exempt amount. By timing your sales strategically and staying within this limit, you can minimise your CGT liability. By spreading out the sales, you can utilise the annual exemption in each tax year, reducing the overall CGT burden.

2. Loss Offsetting

Loss offsetting refers to the practice of using capital losses from certain investments or cryptocurrencies to offset capital gains from other investments or assets. When you sell an investment at a lower price than what you originally paid for it, you incur a capital loss. Capital losses from other investments or cryptocurrencies can be offset against your gains, reducing your overall taxable capital gains.

There are special rules which apply where you quickly buy back the same tokens – called Bed and Breakfasting. These apply where sale and purchase happen within 30 days of one another. There is more detail on bed and breakfasting in the crypto tax book.

3. Tax-advantaged wrappers

In theory, one might consider utilising tax-advantaged accounts such as ISAs (Individual Savings Accounts) or pension schemes , which offer tax-efficient ways to hold cryptocurrencies and potentially shield your gains from taxation.

However, in practice, these are still mainly operated by traditional finance houses that have not yet embraced crypto. There are some more agile providers who do offer these services however.

4. Seek Professional Advice

Engaging a crypto tax professional or accountant with expertise in cryptocurrencies can provide valuable guidance tailored to your specific situation and help you maximise your tax efficiency while staying compliant within the realms of the law.

Always stay on the right side of the law with Crypto Tax Degens

As a crypto earner in the UK, understanding your tax obligations is crucial to avoid any penalties or legal issues. Remember, seeking professional crypto tax advice is always recommended to ensure compliance and make informed financial decisions in the crypto space. Luckily, you’ve found the right people.

Join our community of crypto tax degens today for evergreen information about the complicated crypto tax world, straight from the mouth of notorious crypto tax expert, Andy Wood.