Everything you need to know about cryptocurrency tax in the UK

Introduction

Do you have to pay taxes on crypto?

Yes! Whether you’re swapping, selling, mining, or earning in crypto, you may have to pay taxes. Let’s find out more about paying tax on the different types of crypto.

Buying and Selling Crypto

When you buy and sell cryptocurrencies, the tax implications are clear-cut. If you sell crypto for more than you paid, that’s a capital gains scenario, and HMRC will tax you.

This is for whether you’re trading regularly or just occasionally. Keep track of your transactions because, come tax time, each sale can impact your tax bill.

1. Paid in Crypto

Whether it’s your salary, freelance fees, or any other earnings, if you receive it in Bitcoin or any other cryptocurrency, HMRC treats it as income. This means you’ll owe income tax and National Insurance contributions based on the value of the crypto at the time you receive it. Not declaring your income can lead to jail time or a fine of up to £5000, so keep detailed records.

2. Crypto You Inherit

Inherited crypto falls under the same umbrella as other inherited assets, which means if you receive cryptocurrency as part of an estate, it could be subject to Inheritance Tax. However, any subsequent increase in value from the time you inherit to when you dispose of it might also attract Capital Gains Tax. Stay vigilant, and you should be fine, but any mistakes could end up costing you.

3. Crypto Mining and Validating

The income you make from mining and validating, whether through rewards or fees, is subject to Income Tax. It’s a vital part of the crypto ecosystem, but it’s also another form of income for HMRC.

4. Mining as a Business

If you’re mining crypto on a larger scale, HMRC may consider your activities a business. This means you’re not just liable for Income Tax on the profits, but you’ll also need to consider other aspects of business taxation, like National Insurance contributions.

5. Mining as a Hobby

Even if you’re mining crypto as a hobby and earning an income, you must still declare it. However, the tax treatment might differ slightly from mining as a business, focusing more on Income Tax on the profits earned.

6. Staking

Staking your crypto assets to support a network and earn rewards? These rewards are viewed as income by HMRC and are subject to Income Tax. It’s a passive way to grow your crypto stash, but it’s important to remember that it’s not tax-free income.

7. Airdrops

In some cases, you might receive cryptocurrencies through an airdrop. The tax treatment of airdrops can vary. Generally, if you receive an airdrop without doing anything in return (for example, as part of a marketing campaign), it might not be subject to Income Tax initially. However, if you later dispose of these airdropped tokens, Capital Gains Tax could apply.

8. ‘HODL’ing Crypto

Simply holding onto your cryptocurrencies, often referred to as ‘HODL’ing in the crypto world, doesn’t trigger a tax event. You’ll only face potential tax implications when you dispose of them (selling, trading, or spending).

9. Transferring Crypto Between Your Own Wallets

When you transfer crypto between wallets you own, it’s like moving money between your own bank accounts. This means there is no tax because you’re not making a sale or a profit.

10. Buying Crypto with Fiat Currency

Purchasing cryptocurrencies with money such as GBP, is the starting line of your crypto journey and it’s tax-free. Think of it as putting your money into a new form of investment. However, this is only the first step; the real tax considerations begin when you sell, exchange, or use this crypto.

11. Gifting Crypto to a Spouse

Gifting cryptocurrencies to your spouse or civil partner is like giving a regular gift but in digital form, and it’s usually free from immediate Capital Gains Tax. However, if your spouse decides to sell or use the crypto, they’ll need to consider the crypto-gifting tax implications based on its value at the time of disposal.

12. Income Tax on Crypto

When it comes to cryptocurrencies, Income Tax in the UK applies to certain types of transactions. If you’re earning crypto through employment, mining, staking, or as payment for services, this is considered income and taxed accordingly. The amount of Income Tax you pay depends on your total taxable income, including your crypto earnings.

This income falls into the same tax bands as your regular income, so the rate you pay could be 20%, 40%, or even 45%, depending on your income bracket. Remember, it’s your responsibility to report these earnings to HMRC through a Self Assessment tax return, ensuring all your crypto income is accounted for alongside your other income sources.

Capital Gains Tax (CGT) on Crypto Gains

CGT applies when you dispose of your cryptocurrencies – that means selling them, exchanging them for another crypto, or using them to pay for goods or services. You’re taxed on the profit or ‘gain’ you make, not the entire sale amount.

The rate of CGT depends on your income tax band – it’s 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayers. However, these rates can change, and keeping on top of current tax regulations is crucial. Calculating CGT involves deducting the cost of acquiring the crypto (plus any allowable expenses) from the sale price to determine the gain.

Can I Avoid Paying Tax on Crypto?

You cannot avoid paying tax on taxable crypto transactions, but there are certain instances where paying tax isn’t applicable. Understanding these can help you make informed decisions about your crypto activities.

HMRC Reporting Requirements for Crypto Investors

There are a fair few requirements for reporting your crypto to HMRC. We’ve listed them below to help:

Type of Tokens:

HMRC needs to know the specific types of cryptocurrencies in your portfolio, as different types of tokens might have different tax implications.

Date of Disposal:

The date of disposal determines in which tax year your transaction falls, which can affect how much tax you owe.

Number of Tokens Disposed:

HMRC wants to know exactly how many tokens you disposed of. This helps in accurately calculating any capital gains or losses. It’s a bit like counting the number of shares sold in a stock market transaction.

Number of Tokens Remaining:

HMRC wants to know exactly how many tokens you disposed of. This helps in accurately calculating any capital gains or losses. It’s a bit like counting the number of shares sold in a stock market transaction.

Value of the Tokens in Pound Sterling:

The value of your transactions in GBP is key for HMRC to assess your tax liability. They need these figures in the local currency to apply the relevant tax rules. It’s like translating a foreign currency into pounds.

Bank Statements and Wallet Addresses:

The value of your transactions in GBP is key for HMRC to assess your tax liability. They need these figures in the local currency to apply the relevant tax rules – similar to translating a foreign currency into pounds for clarity and consistency.

Records of Pooled Costs Before and After Disposal:

It’s important to maintain records of your crypto ‘pool’ costs both before and after any disposals. This information is important for accurate tax calculations and reflects the changing value of your investment over time.

Navigating the waters of UK crypto taxation with confidence

As we’ve seen, a whole load of crypto-related activities can be taxed – from trading and mining to staking, and even inheriting crypto. It’s essential to stay informed about the latest HMRC guidelines, as the world of crypto is fast-moving and constantly evolving.

Remember, keeping detailed records of your crypto transactions, understanding the nuances of Capital Gains Tax and Income Tax, and knowing when you can avoid tax are key to managing your digital assets effectively.

If you want to stay informed, stay compliant, and let your crypto adventure continue with confidence, why not join our community of Crypto Tax Degens. With us, you can enjoy exclusive access to some of the best minds in the world of crypto tax advice, Andy Wood.