Are you seasoned in cryptocurrency? Or is it completely new to you? Maybe you are just intrigued at the prospect of investing?
Whatever your situation, before you delve deeper into the world of cryptocurrency or bitcoin, it’s wise to understand how HMRC taxes them.
Here's everything you need to know about tax on cryptocurrency in the UK.
If you don’t have time to read HMRC’s full guidance for those with crypto assets, which you can find it here, our comprehensive guide offers a closer look into everything you need to know about UK cryptocurrency taxes.
Do you have to pay taxes on crypto?
Sadly, yes – for most crypto investors. There are some exceptions to the rules, however.
Crypto assets aren’t considered as money or currency by key financial institutions. From a tax perspective, crypto assets are treated like shares and will be taxed accordingly.
While crypto trading has a reputation for being underhand, legitimate crypto investments will be watched with a close eye by tax regulators.
Crypto traders and investors need to be aware of the wide array of transactions ranging from basic purchase and sell orders all the way through to hard forks, airdrops, staking, etc.
The crypto industry is developing rapidly, and the position on tax has inevitably become more complicated. The emergence of unique and complex cryptocurrency like gaming and gambling platforms as well as the evolution of non-fungible tokens and hybrids tokens for specific purposes, has changed the asset class.
If you are not a UK tax resident, or do not have a domicile in the UK, then you can benefit from more favourable tax rules.
When do you pay tax on crypto?
There are several activities associated with cryptocurrency that you will be taxed on:
Buying and selling crypto
If you’ve sold your crypto for more than you bought it, you’ll likely pay capital gains tax on the profit.
If you lost money through trading, those losses could minimise your capital gains tax bill. It’s also important to remember that swapping cryptocurrencies will trigger a capital gains taxable event, because you will be selling crypto to other investors or liquidity pools.
If you’re trading huge amounts of crypto – or anything that will be considered ‘exceptional circumstances’ – HMRC will think you are a trader and ask you to pay income tax on trading, rather than capital gains taxes.
Paid in crypto
Regardless of the cryptocurrency you’re paid in, or who pays you, you’ll have to pay income tax and national insurance contributions.
Crypto you inherit
HMRC treats cryptocurrency as property under UK tax law.
Mining and validating
Mining cryptocurrency will either be considered a hobby or fully-fledged business. This will depend on several factors:
Degree of activity
Mining as a business
If your mining activity is considered a business, the mining income will be added to trading profits and be subject to income tax deductions.
When you dispose of the cryptocurrency, any gain in value from the acquisition time will be added to your trading profits, and the transaction may be subject to NICs.
Mining as a hobby
If your mining activities can be classed as a hobby, any income must be declared under miscellaneous income when you fill out your tax return. It will be the fair market version of the value of the crypto at the time you received it.
Any rewards or fees received in exchange for mining activity will also be added to your taxable income.
However, you may be able to deduct reasonable expenses from the income before adding it to the taxable income. But it will be subject to capital gains tax when you dispose of this crypto.
According to HMRC, the GBP value of any tokens awarded at the time of receipt will be taxable as miscellaneous income with any reasonable expenses reducing the chargeable amount.
Individuals may want to treat it as savings income and claim personal savings allowance to further reduce taxes due. Speak with a tax accountant if you consider this, as capital gains tax rules may apply if you dispose of it at a later date.
How much tax do you pay on crypto/crypto gains?
Income tax is usually applied to those buying, selling or receiving cryptocurrency through a trade.
A ‘day-trader’ is probably the most obvious example – someone who actively buys and sells crypto assets to create short-term profit.
However, individuals are unlikely to meet the description of a ‘trader’ for income tax purposes if trading on their own account, meaning they will likely be considered under the capital gains tax regime.
To fall into the definition of ‘trading’, you would need to buy and sell crypto assets with such intention, sophistication, frequency and level or organisation that the activity amounts to a financial trade.
If you meet the trading threshold, net profits will be subject to income tax at 20%, 40% and 45% (based on the tax bracket your income falls into) and national insurance at 12% and 2%.
Any money made from crypto as an income will count towards your income tax: 0% to 45% depending on your tax band in England, Wales and Northern Ireland, or if you’re in Scotland – which has two more bands – a 19% starter rate and 21% intermediate rate,
Capital gains tax
In most cases, anyone buying, holding and selling cryptocurrency on their own account are considered to be undertaking investment activity and are subject to capital gains tax.
Disposing of crypto assets will result in a taxable event, with the value of any disposal proceeds matched against purchases in a specific order:
Crypto assets acquired on the same day
Crypto assets acquired in the following 30 days
The average cost of any unmatched crypto assets (‘the pool’)
Individuals pay capital gains tax on their total gains above an annual tax-free allowance of £12,300. Any gains above this allowance will be taxed at 10% up to the basic rate tax band (if available) and 20% on gains at the higher and additional tax rates.
Can I avoid paying tax on crypto?
There are some instances in which individuals will not need to pay tax on crypto.
Income tax will not be applied to airdropped crypto if:
They aren’t accepted as part of a trade or business involving crypto
They’re received without doing anything in exchange
However, if airdrops are received in return for carrying out a service, they will in fact be subject to income tax and classed as miscellaneous income, or trading profits (if you are a business).
If a crypto trader or business receives an airdrop, any valuation increase will be added to the trading profits and will be subject to income tax, as well as NICs. But if an individual receives an airdrop, that will be subject to capital gains tax at the time of the disposal.
Similarly, the following crypto transactions aren’t subject to capital gains tax or income tax in the UK:
‘HODL’ing crypto – essentially intending to hold your crypto for as long as you possibly can
Transferring crypto between your own wallets
Buying crypto with fiat currency, e.g., GBP
Gifting crypto to a spouse
How to pay tax on crypto
Accurate record keeping is really important for anyone who is self-employed, and crypto investors are one such group who also need to keep accurate records for tax purposes too.
HRMC says crypto investors must declare the following:
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
Records of the pooled costs before and after you disposed of them
Getting the right financial advice for your circumstances is key.
If you’re still not sure what you need to declare, find your perfect financial adviser with Unbiased now.