Cryptocurrencies have surged in popularity, not just as a novel investment avenue but also as a matter of financial legislation. In the United Kingdom, understanding the tax implications of dealing with cryptocurrencies is paramount. From individuals to businesses, the tax landscape is complex and multifaceted, necessitating a comprehensive guide to navigate this evolving domain.
The national taxing authority of the UK is His Majesty’s Revenue & Customs (HMRC), which sets guidelines and collects tax payments from individuals and businesses. The HMRC is known as one of the most progressive taxing authorities in the world, leading international efforts for crypto tax standardization and overall clarity.
In this article, we are going to examine the UK’s tax legislation framework and dive into what constitutes a taxable event, how much tax you can expect to pay, whether you can avoid paying taxes on crypto gains, and much more.
- The UK classifies crypto assets into 4 categories, including exchange tokens, utility tokens, security tokens, and stablecoins.
- Various transactions, from selling crypto to receiving it through mining, airdrops, or employment, carry tax liabilities and must be reported accordingly.
- Triggered upon disposing of crypto assets, the capital gains tax applies to selling, exchanging, or gifting. CGT ranges from 10% to 20%, depending on the income in a given tax year.
- Earned through trading, mining, airdrops, or employment, any cryptocurrency earned through income is subject to income tax. Income tax ranges from 0% to 20%, depending on the income.
Types of crypto assets recognized by the UK
The UK recognizes various types of cryptocurrencies, classifying them as utility tokens, exchange tokens, and security tokens. Each classification carries different tax implications and must be understood before diving into tax obligations:
- Exchange tokens (e.g., Bitcoin): These are like traditional fiat currency in
- that they are intended to be used as a means of payment or exchange.
- Utility tokens (e.g., BNB): Grant holders access to a service or product within a specific blockchain-based ecosystem. Utility tokens are not intended to be an investment or to represent ownership in a company.
- Security tokens (e.g., Polymath): Have characteristics of traditional investments (e.g., shares or debt instruments) and bring with them similar rights and obligations.
- Stablecoins (e.g., Tether): Privately issued cryptoassets designed to have minimal price
- volatility, which is usually achieved by pegging their value to fiat currencies (like the US dollar or the euro) or other real-world assets (like gold).
If you want to learn more about crypto assets classification, feel free to check the report published by TheCityUK, a financial industry advocacy group from the UK.
Crypto assets in the UK are regulated by The Financial Conduct Authority (FCA), which is the country’s main financial regulator. As of November 2023, FCA doesn’t directly regulate exchange tokens and utility tokens but does regulate security tokens. The Treasury is planning to extend the FCA’s powers to regulate fiat-backed stablecoin under the Regulated Activities Order (RAO) act, which is expected to come into effect in early 2024.
Types of crypto taxes you need to be aware of: What constitutes a taxable event
Crypto taxes that you need to pay in the UK fall broadly into two main categories: capital gains tax and income tax.
There are cryptocurrency transactions the UK’s tax authorities recognize as taxable events. Below you will find them categorized in capital gains and income tax brackets.
Capital gains tax:
- Selling crypto accrued from investments for a profit
- Swapping crypto for crypto
- Spending crypto on goods and services
- Gifted crypto
- Inherited crypto
- Crypto received from hard forks
- Profits earned from crypto trading activity
- Crypto received from mining and liquidity mining
- Crypto received in airdrops
- Crypto received from an employer
We’ll explore each of these events in more detail in the following sections.
Capital gains tax (applies when you dispose of a crypto asset)
Capital gains tax (CGT) applies when disposing of cryptocurrencies, be it selling, exchanging, or gifting. It’s crucial to understand the thresholds, exemptions, and reporting obligations concerning CGT.
How capital gains tax is calculated:
If you bought Bitcoin for £20,000 and sold it for £30,000, your capital gain would be £10,000 (£30,000 – £20,000). This gain is subject to CGT.
The capital gains tax applies when you:
- Sell your tokens
- Exchange your tokens for different types of crypto assets
- Use your tokens to pay for goods or services
- Give away your tokens to another person (unless it’s a gift to your spouse or civil partner)
To report and pay capital gains tax, you can complete a self-assessment tax return or use the CGT real-time service to report it straight away. Records you must keep for the HMRC (as described on the UK government’s official site):
- Type of tokens
- Date you disposed of them
- Number of tokens you’ve disposed of
- Number of tokens you have left
- Value of the tokens in pound sterling
- Bank statements and wallet addresses
- A record of the pooled costs before and after you disposed of them
The rate of capital gains tax you will pay depends on your taxable income in a given tax year. Here is the table including different tax brackets and expected CGT rate:
Tax year 2022/2023
In addition to the three main brackets, there’s also the so-called free allowance which allows you to pay zero CGT. For the tax year 2022/2023, that amount was set at £12,300. However, the free allowance amount was decreased to £6,000 for the tax year 2023/2024 and will be further reduced to £3,000 for the tax year 2024/2025.
It is worth noting that you can deduct certain costs and thus decrease your taxable capital gains amount. These deductions include any losses accrued by selling cryptocurrency at a lower value than when it was bought, blockchain fees involved in transacting crypto, and income tax paid on the cryptocurrency.
Selling crypto accrued from investments for a profit
When you sell cryptocurrencies for fiat currency (like GBP), this triggers a taxable event. The capital gain is calculated based on the difference between the selling price and the original purchase price or the ‘cost basis.’ The resulting profit is subject to capital gains tax.
Swapping crypto for crypto
Swapping one cryptocurrency for another incurs a taxable event. The CGT applies here as well, and it’s calculated based on the market value of the cryptocurrency at the time of the swap.
Spending crypto on goods and services
Using cryptocurrency to buy goods or services is another taxable event. The tax liability arises from the difference between the market value of the crypto when you acquired it and its value when spent or sold.
If you receive cryptocurrency as a gift and later sell it, the selling price minus the fair market value at the time of the gift constitutes the capital gain. This gain is subject to capital gains tax upon selling.
In addition, when gifting crypto, the capital gains tax applies as well. However, it is worth noting that gifting crypto to your spouse or civil partner is also exempt from CGT.
Inherited cryptocurrency is treated similarly to gifted crypto. The tax is calculated based on the difference between the selling price and the fair market value at the time of inheritance.
In addition, inherited crypto is subject to inheritance tax as well. As of 2023, the threshold for inheritance tax is £325,000 – if the inheritance sum is smaller than that, you pay zero inheritance tax; if the sum is larger, then the 40% inheritance tax rate applies.
Crypto received from hard forks
When a blockchain splits, resulting in a new cryptocurrency being created, it’s known as a hard fork. If you receive new coins from a hard fork, their value at the time of receipt will be considered when calculating capital gains if you later dispose of these coins.
Income tax (applies when you earn a crypto asset)
Income tax is applicable if an individual receives crypto as income, such as through mining, staking activities, or as a payment from an employer. Understanding how income tax applies is pivotal to compliance.
How income tax is calculated:
Let’s say you earn £60,000 in a given tax year. The income up to the personal allowance amount (£12,570) will be taxed at 0%. The tax on your next £37,700 will be 20%. The final £9,730 will be taxed at 40%.
The income tax applies when you:
- Profit from crypto trading activity (if you are a professional)
- Receive tokens from mining and staking
- Receive airdrop rewards
- Receive tokens from an employer
To report and pay income gains tax, you must keep records as required by the HMRC (as described on the UK government’s official site) that include:
- Type of tokens
- Date you received them
- Number of tokens you received
- Number of tokens you have in total
- Value in pound sterling
- Bank statements
- The date you disposed of the tokens
The rate of income tax you will pay depends on your taxable income in a given tax year. Here is the table including different tax brackets and expected income tax rates:
Tax year 2022/2023
Keep in mind that for individuals who earn over £100,000 per year, the personal allowance doesn’t apply directly. Here’s how the HMRC explains the distinction:
“If you earn over £100,000, the figure of £12,570 will be reduced by £1 for every £2 earned over the £100,000 limit. If you earn £125,000, you pay Income Tax on everything and there’s no tax-free allowance.”
It is worth noting that if you receive crypto as a payment, the cost basis for income tax will be calculated based on the value of the cryptocurrency you received at the time of payment expressed in the British pound.
There’s also the distinction between different types of mining income you need to consider. If you mine crypto professionally, your income will be subject to income tax under trading income rules. On the other hand, if your mining is more casual, you will be subject to income tax as miscellaneous income.
Profits earned from crypto trading activity
If you make a profit from trading cryptocurrency as a profession, you will be liable to pay income tax. The current income rate in the UK is 10% for basic-rate taxpayers and 20% for higher-rate taxpayers.
Read more: 8 Best Crypto Exchanges in the UK For 2023
There are two ways to calculate your income tax liability from crypto trading. The profits method involves calculating the profit you make on each individual transaction. To do this, you will need to subtract the cost basis of the cryptocurrency from the selling price. The cost basis is the amount you paid for the cryptocurrency, plus any additional costs you incurred, such as trading fees.
The second way is to use the pooled method, which involves calculating your overall profit or loss from all of your crypto trades over the tax year. To do this, you will need to add up all of your profits and losses from all of your trades.
If you are a professional cryptocurrency trader in the UK, your profits are subject to income tax.
Crypto received from mining and liquidity mining
In the UK, cryptocurrency mining and liquidity mining are considered to be taxable activities. The income you earn from these activities will be subject to Income Tax. The rate of Income Tax you pay will depend on your overall income for the tax year.
Crypto received in airdrops
Airdrops are a way for cryptocurrency projects to distribute their tokens to a wider audience. In an airdrop, tokens are sent directly to the wallets of eligible users, which is considered to be a taxable event and is subject to income tax rate brackets.
Crypto received from an employer
If you receive cryptocurrency from your employer, the tax implications will depend on the circumstances of the payment. If you receive cryptocurrency as part of your salary, it will be subject to Income Tax in the same way as your other earnings. If you receive cryptocurrency as a bonus or other form of non-salary payment, the tax implications will depend on the value of the payment.
How is the cost basis for crypto taxes calculated
The cost basis method is a method for calculating the amount of capital gain or loss on the sale of an asset, including cryptocurrency. It is used for tax purposes to determine the amount of taxable income or deductible loss. The cost basis of an asset is generally the original purchase price of the asset, plus any additional costs incurred in acquiring the asset, such as commissions or fees.
There are three rules you need to follow that are prescribed by HMRC. The rules must be applied in the following order:
1. Same-day rule
The Same-Day Rule applies when an investor buys and sells the same cryptocurrency on the same day. This rule is designed to prevent investors from artificially reducing their tax liability by selling high-cost lots of cryptocurrency and then immediately repurchasing low-cost lots. If you sell more crypto than you buy on a given day, you must follow the second rule.
2. Bed and Breakfasting Rule
The Bed and Breakfasting Rule applies when an investor sells and then repurchases the same cryptocurrency within a 30-day period. This rule is designed to prevent investors from artificially deferring their tax liability by selling high-cost lots of cryptocurrency and then immediately repurchasing low-cost lots just before the end of the tax year. If you sell more crypto than you buy during the 30-day period, you must proceed to the third rule.
3. Section 104 Rule
The Section 104 Rule applies when neither the Same-Day Rule nor the Bed and Breakfasting Rule are applicable. The Section 104 Rule dictates that you must calculate the average cost basis for a pool of assets. To do so, you need to add up the total spent amount and divide it by the total number of coins held. This will yield the average cost of your coins and tokens.
Crypto taxes in the UK FAQ
How to cash out crypto without paying taxes in the UK?
Cashing out crypto without tax implications is a misconception. Most transactions incur tax liabilities, but proper tax planning and utilizing exemptions can minimize the tax burden.
Do you pay tax on crypto gains in the UK?
Yes, gains from crypto transactions are subject to tax. Capital gains and income tax apply based on the nature of the transaction.
When do I pay tax on crypto in the UK?
Tax liabilities arise when a taxable event occurs. Reporting and payment deadlines vary based on individual circumstances and must be adhered to for compliance.
How is crypto taxed in the UK?
Crypto taxation involves capital gains tax, income tax, gift tax, and inheritance tax, depending on the nature of the transaction.
The bottom line
As we conclude this comprehensive guide on crypto taxes in the UK, it’s evident that navigating this financial domain requires a deep understanding of its complexities. Recognizing various crypto asset types and comprehending taxable events for capital gains and income tax are pivotal. Whichever way you slice it, tax liabilities are inevitable and require quite a bit of knowledge if you want to avoid potential penalties and interest on missed payments.
The legal landscape is constantly changing, so it can be really difficult to stay on top of all the intricacies surrounding tax regulation. On top of that, the UK, together with 48 other OECD countries, is preparing to launch the Crypto-Asset Reporting Framework (CARF), which will impose additional rules for crypto platforms and make it easier for tax authorities to track crypto transactions. The regulation is expected to come into effect in 2027.
If you are feeling overwhelmed by it all, we suggest you seek out professional help when filing taxes. Check our list of the best cryptocurrency accountants to find out more.
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