January 8, 2024

Cryptocurrencies and Income Tax

Last Updated: January 23, 2024

Crypto and UK Income Tax

Introduction

Cryptocurrency, the digital gold rush of our era, has transformed from a niche interest into a significant player on the global financial stage. This rapid evolution has brought with it a maze of tax considerations, as mystifying as the cryptocurrencies themselves.

For those in the UK dabbling in this digital frontier, it’s important to understand that there are two primary types of taxes that apply to your crypto transactions: Income Tax and Capital Gains Tax.

In this blog, we’re going to zero in on Income Tax, unravelling its complexities and guiding you on how to determine the amount of income tax you owe on your crypto assets. Whether you’re a seasoned crypto trader or a curious newbie, our aim is to provide clarity and direction, ensuring you stay on the right side of the law while optimising your tax obligations. Let’s get into it.

When You Need to Pay Crypto Tax as Income Tax

In the UK, diving into the world of cryptocurrencies isn’t just about riding the digital wave. Whether you’re swapping, selling, mining, or earning in crypto, there’s a tax angle to consider. The HMRC may not count Bitcoin and friends as traditional cash, but your digital dabblings could still have real-world tax implications.

From your casual crypto trading to mining as a side hustle, each transaction has its own tax story. Let’s find out more about paying tax on the different types of crypto

Finding your way through the world of cryptocurrencies can be as thrilling as a rollercoaster ride, but when it comes to crypto taxes, it’s more like a meticulous board game.

Certain scenarios involving your digital treasure trove can trigger Income Tax obligations, and understanding these is your golden ticket to staying compliant with HMRC. Let’s spotlight the key situations where your crypto gains are not just digital numbers, but real income that’s subject to Income Tax:

  • Getting paid in crypto: If you’re receiving crypto currencies as payment for your services – be it as an employee, freelancer or contractor – it’s taxable. The value of the crypto at the moment it lands in your digital wallet is what counts as your taxable income. Yes, this means Income Tax and National Insurance contributions are in play, just like they are with your good old GBP earnings.
  • Mining cryptocurrencies: The rewards you get from mining for crypto is considered a form of income by HMRC. This applies whether you’re mining as a serious business or just as a hobby. The key here is the value of the cryptocurrency at the time you receive it – this is what you need to declare as income.
  • Crypto staking rewards: For those of you nurturing your crypto assets by staking them to support a blockchain network, the rewards you reap are also considered income. It’s like earning interest, but in crypto. These rewards are taxable based on their value at the time you get them.
  • Airdrops as payment: Sometimes, the crypto skies rain coins through airdrops, especially as compensation for services or participating in promotions. These aren’t just freebies; they’re income and taxed as such.
  • Trading crypto: Lastly, if you find yourself trading crypto in large amounts and with lots of organisations, your profits might just fall under the Income Tax radar. This is especially true if your trading patterns resemble a business more than a casual activity.

So, there you have it – the crypto tax landscape in a nutshell. Keeping these scenarios in mind will help ensure your crypto adventures are not just exciting but also tax-compliant.

Calculating your crypto income tax in the UK

We know that tax can get complicated and sometimes overwhelming. But don’t worry – understanding how much tax you need to pay on your crypto income can be broken down into three manageable steps. Here’s how:

Identifying your crypto income

First things first, let’s figure out which crypto tokens fall under the Income Tax umbrella. Remember, this can include any of the five points listed above. Once you’ve pinpointed this, the next step is to figure out their worth.

Figuring out the Fair Market Value (FMV)

This step is all about figuring out how much your crypto was worth at the exact moment you got it. Crypto prices can change really fast. So, it’s key to know what the value was right when you received it. If the value goes up or down later, that doesn’t matter for your taxes. It’s all about the value at that specific time.

After you know when you got your crypto, the next step is to convert its value to British Pounds (GBP). This is crucial because you report and pay taxes in pounds, not in crypto.

Finding your tax rate

Now that you’re armed with your crypto income in GBP, add this figure to your other earnings to work out your total taxable income. From this, you can find your tax rate. Here are the tax bands from 2022/23 to help you out:

  • Personal allowance: Up to £12,570 at 0%
  • Basic rate: £12,571 – £50,270 at 20%
  • Higher rate: £50,271 – £150,000 at 40%
  • Additional rate: Over £150,000 at 45%

For example, if you earn £35,000 per year from regular employment, and £10,000 from crypto, you fall under the ‘basic rate’ category. This means you’ll need to pay 20% tax on your crypto income.

Give our free crypto tax calculator a try to find out how much tax you potentially owe to HMRC.

Not sure if you owe on capital gains? Speak to the in-house crypto cgt experts.

Your crypto tax journey made easier

It’s clear that the world of cryptocurrency can be as detailed as a labyrinth. From understanding what counts as taxable income to determining your tax rate, each step is a critical piece in the puzzle of crypto tax compliance.

But remember – you’re not alone. Whether you’re a seasoned crypto trader, a newcomer to the digital currency space, or somewhere in between, our team of crypto tax experts is here to guide you through the complexities of crypto taxation.

We offer honest, experience-driven advice, tailored to your unique situation. So, if you find yourself with questions, you can count on us to have the answers. Get in touch and join our community of crypto degens today.

Andy Wood

Andy has a breadth of experience as a Barrister and as a Chartered Tax Advisor, which means he comes into the crypto space with expertise he can't wait to share.

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