January 8, 2024

Everything you need to know about cryptocurrency tax in the UK

Last Updated: January 23, 2024

Everything You Need To Know About UK Crypto Tax

Introduction

Whether you’re a seasoned trader, a casual investor, or finding yourself dabbling in crypto mining, understanding the UK’s tax laws regarding cryptocurrencies is crucial. This guide will walk you through:

  • Do you have to pay taxes on crypto?
  • Income Tax on Crypto
  • Capital Gains Tax on Crypto Gains
  • Can I Avoid Paying Tax on Crypto?
  • HMRC Reporting Requirements for Crypto Investors

Let’s demystify the UK’s stance on crypto taxation and ensure you stay on the right side of the law.

Do you have to pay taxes on crypto?

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

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 for it, that’s a capital gains scenario, and HMRC will tax you on it. (Speak to a crypto cgt advisor for professional advice)

This applies whether you’re trading regularly, or just occasionally cashing in on the crypto wave. Keep track of your transactions because, come tax time, each sale can impact your tax bill.

1. Paid in Crypto

Getting paid in crypto? It’s taxable. 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. It’s essential to keep detailed records for accurate tax reporting. You don’t want to end up on the wrong side of the law as not declaring your income can lead to jail time or a fine of up to £5000.

2. Crypto You Inherit

Inherited crypto falls under the same umbrella as other inherited assets. If you’re lucky enough to receive cryptocurrency as part of an estate, it could potentially 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 significantly.

3. Mining and Validating

Mining and validating crypto transactions can be quite the lucrative endeavour, but it also brings tax responsibilities. The income you generate from these activities, whether in the form of rewards or fees, is subject to Income Tax. It’s a vital part of the crypto ecosystem, but for HMRC, it’s another form of income.

4. Mining as a Business

If you’re mining crypto on a larger scale, with a degree of organisation and sophistication, HMRC might 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, don’t assume you’re off the tax hook. If your mining activities earn you an income, you’re still required to declare it. However, the tax treatment might differ slightly compared to 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. Learn more about crypto staking tax advice.

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. There’s no tax because you’re not making a sale or a profit. Just be sure to kIncome Tax on Cryptoeep track of these transfers for your records. It’s a bit like keeping a diary of where you’ve moved your digital treasures, just in case HMRC ever asks.

10. Buying Crypto with Fiat Currency

Purchasing cryptocurrencies with fiat money, such as GBP, is the starting line of your crypto journey and it’s a tax-free moment. 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. It’s a bit like buying a painting; it’s only when you sell it that any profit becomes relevant for tax.

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. It’s a bit like passing on a valuable item; the tax responsibility shifts along with the gift.

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 on Crypto Gains

Capital Gains Tax (CGT) kicks in 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 amount of the sale. For the 2023/2024 tax year, the tax-free allowance for capital gains is £12,300; gains beyond this are subject to CGT.

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, do note that these rates can change, and keeping abreast 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?

Navigating the tax landscape with cryptocurrencies might seem daunting, but there are certain instances where tax isn’t applicable. Understanding these can help you make informed decisions about your crypto activities.

HMRC Reporting Requirements for Crypto Investors

Type of Tokens:

HMRC needs to know the specific types of cryptocurrencies in your portfolio. This isn’t just for their curiosity; different types of tokens might have different tax implications, much like different types of investments in the traditional financial world.

Date of Disposal:

The date of disposal is critical for tax purposes. It determines in which tax year your transaction falls, which can affect how much tax you owe. It’s like keeping a timeline of your digital transactions, which is essential for accurate tax reporting.

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 akin to translating a foreign currency into pounds for clarity and consistency.

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 crucial for accurate tax calculations, as it reflects the changing value of your investment over time. Think of it as keeping a ledger of your crypto journey, documenting how your investment has evolved.

Navigating the waters of UK crypto taxation with confidence

As we’ve explored, a range of activities from trading and mining to staking and even inheriting cryptocurrencies have tax implications. 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.

Whether you’re in it for the long haul or taking advantage of short-term market movements, being tax-savvy is an integral part of your cryptocurrency journey. 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.

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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