Cryptocurrencies are increasingly popular investments. While markets remain volatile, the potential profits and wider adoption are making them a viable option for investors. What does that mean for UK crypto tax obligations?
While cryptocurrencies like Bitcoin are decentralised, beyond the control of one governmental or corporate group, the profits are not. If you do invest, even just to dabble in the markets, it is essential you understand the UK crypto tax rules.
Does money you make on digital assets escape taxation, or are you still liable to pay if you play the crypto markets and win?
UK Crypto Tax
No tax is applied directly to any cryptocurrencies in the UK. This mirrors the situation for all currencies, including sterling, the US dollar, and the Euro.
Taxation is not applied in the UK for buying crypto with sterling, holding (or HODLing) crypto, moving your cryptocurrencies between your own wallets, making a cryptocurrency donation to charity, or, in certain circumstances, making a gift of cryptocurrency.
Where investors will be subject to UK crypto tax is when they sell their cryptocurrency and come away with a profit.
In this way, income from crypto is treated in a similar way to other earnings in the UK. So, even if you have only traded once or only dabble infrequently, there may still be a tax bill to pay if you made money.
If you are seen to be earning from your crypto investments – ie, receiving a regular, stable income – then you may be subject to Income Tax. If you are determined to have made a capital gain, then you may be subject to, well, Capital Gains Tax.
Capital Gains Tax
Crypto is seen as a capital asset by HMRC so becomes subject to tax when you dispose of it (which includes selling it for a fiat currency, trading it for another cryptocurrency, and spending it on services and goods). Fortunately, it is only the profit you make that is subject to the tax.
HMRC has a Capital Gains Tax allowance. If your profit is within this, you may not be liable to pay Capital Gains Tax. Above that and you could be taxed, with the rate determined by the amount you have made.
While losses clearly are not subject to Capital Gains Tax, it is worth recording them and reporting them to HMRC as part of your declaration. Losses can sometimes be offset against gains.
You may be able to subtract from your profits certain ‘allowable costs’ associated with cryptocurrencies, such as:
- Transaction fees paid before a transaction is added to a blockchain
- Ad placed to find a buyer
- The contract deal that was put together
- Valuations that aided you in determining your profit from that transaction
If you have already deducted costs from profits for income tax purposes or the cost of mining activities, you cannot do so again (like equipment or electricity).
It’s also crucial to understand the ‘pooling’ idea used by HMRC. Although HMRC claims that, in the end, this leads to simpler Capital Gains Tax calculations, the subject can be challenging.
When calculating your gain, you combine each type of token into a pool, just as you would for routine investments in a single business. However, you do not create pools of tokens if you purchase them on the same day that you sell tokens of the same kind or if you do so within 30 days of doing so.
Income Tax
Income Tax rules may be applied when you are determined to be earning in crypto. For example, if you are paid in cryptocurrency, receive staking rewards, earn mining tokens, or benefit from airdrops, Income Tax may be due.
But what will you owe? There is a personal allowance – the amount you can earn before tax is due – and then different rates are applied for different income brackets.
This is only a broad picture and doesn’t take into account regional differences, such as taxation in Scotland, nor further examples of when UK crypto tax may be due.
How to Pay UK Crypto Tax
Gains from cryptocurrencies are disclosed on your yearly Self-Assessment Tax Return. The real-time Capital Gains Tax reporting service offered by HMRC is another option. Keep in mind that profits are expressed in pounds sterling.
As always, it’s critical to maintain correct records for your taxes, which also contain information about your crypto activity. According to HMRC, this includes:
- Tokens’ type
- The day when you got rid of them
- How many tokens you’ve thrown away
- How many tokens you still have
- Value of the tokens in British pounds
- Addresses on wallets and bank statements
- Documents showing the pooled charges both before and after you dispose of them
If in any doubt, speak to HMRC or an expert adviser.
Stay on Top of UK Crypto Tax
Much like the cryptocurrency industry, the UK crypto tax scene is constantly evolving.
That’s why it is crucial to stay up to date with the latest rules to avoid falling foul of HMRC. A useful guide is the HMRC’s own Cryptoassets Manual.
It can prove hard, however, to stay fully on top of all your crypto transactions, each profit and loss, and understand which tax rules apply, when, and at what rate.
There are tools available to help you keep better records and make producing a tax report more straightforward. A popular and trusted one is Koinly.
