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Tax on cryptocurrency in the UK
Do you have to pay tax on cryptocurrency in the UK? While the answer to this question is relatively straightforward, some nuances to the tax system can make it difficult to understand how HMRC treats the altogether different asset classes.
We’ve prepared a comprehensive guide to help you understand all the information you need regarding filing tax returns on cryptocurrencies within the UK.
We’ll discuss how the tax on crypto capital gains is a part of cryptocurrency income tax, HMRC cost basis methods for reporting capital gains and losses, and which UK crypto exchanges are required to register to HMRC. Additionally, we will inform you about the most well-known tax breaks for digital currencies and cryptocurrency in the UK.
Cryptocurrency is taxable, so you need to report it on your tax return.
When does cryptocurrency become susceptible to tax on capital gains?
Cryptocurrency is considered personal property. So trading, swapping, or spending will be subject to tax on cryptocurrency capital gains. However, not all disposals are subject to capital gains taxes; only those that result in a profit will be subject to pay capital gains tax on cryptocurrency. The following are examples of events that can lead to a capital gain:
- Profits or losses made from buying, selling, or trading cryptocurrency for fiat currency such as GBP.
- Profits of any kind are made by exchanging tokens or cryptocurrencies for other services and goods, including selling crypto to pay for services rendered.
- Note that this does not apply to crypto being given away for free as a gift.
What amount of Capital Gains tax will you be required to pay on your cryptocurrency?
The taxpayers of the individual tax bracket in the UK can enjoy an exemption from taxation for capital gains (including gains from crypto) of £12,300 in the tax year 2021/22. Therefore, if your crypto earnings are lesser than £12,300 and you are not a taxpayer, you don’t have to declare this to the HMRC.
Capital gains tax is calculated according to the income tax band of a person. So, the higher your income, the more the CGT rate you pay.
|Capital Gains Tax Rate||Income Tax Band|
|10%||Basic rate Income Tax band (up to £50,270)|
|20%||Higher rate Income Tax band (up to £150,000)|
|20%||Additional rate Income Tax band (more than £150,000)|
When can cryptocurrency be taxed as income?
HMRC has clear guidance and makes it clear that what you earn from crypto is counted as taxable income. In the UK, individual investors who acquire specific cryptocurrencies and tokens must pay their income tax and National Insurance Contributions (NICs).
- Being paid with altcoins or bitcoin:
Any cryptocurrency received as payment for services is taxable income, so you should report this on your tax return. In addition, all cryptocurrency received as part of your job is subject to income taxes. That’s because the government views crypto as a monetary value.
Monetary value could be anything that you could convert into money. However, you must pay income taxes on income and all or part of investments, including cryptocurrencies.
Getting paid by a company in digital currency is potentially taxable, and you are required to pay income tax and national insurance contributions on your cryptocurrency’s worth.
Suppose you receive any part of your salary or freelance income as crypto for work done. In that case, you may need to pay taxes on that income based on the value of the earnings at the time of receipt. This is because the government treats crypto assets differently depending on how readily exchangeable, they are.
Mining cryptocurrency is considered a full-fledged business activity: it is classed if you are engaging in it. However, if you were to take a deeper look into the mining field, things become much more complex. Several factors determine whether you are operating your business or doing it on a hobby basis:
- Degree of activity
- Mining as a source of revenue:
If cryptocurrency mining is treated as a business, it will likely be subject to income tax. In addition, when you dispose of or sell your cryptocurrency after gaining value, you must add it to your trading profits and thus have NICs deducted from them.
- Mining as a pastime/hobby:
Suppose your mining activities are considered a hobby and have not begun or proceeded as a business. In this case, it is necessary to declare the mining income tax-deductible by using a miscellaneous income category in the tax returns. This is because the cryptocurrency’s market price is added to your income tax when received at the time of receipt. Furthermore, any benefits or commissions you earn from mining activities are added to your taxable income.
You can reduce reasonable expenses before adding the earnings to your tax returns. However, keep in mind that you must be taxed on capital gains following the disposal of any cryptocurrency.
HMRC states that earning any form of currency as an employee will be taxed at your regular income tax rate. You’re allowed to cut back a certain amount on your taxable income each year, though; this is called your ‘personal allowance’. You may want to treat this as savings and claim your tax allowance to reduce taxes further.
However, we recommend speaking with one of our crypto accountants if you consider this. Please note that capital gains tax might apply if you sell or dispose of the cryptocurrency later.
Airdrops will not be taxed if accepted as part of a trade or business involving cryptocurrency. However, they will not be subject to income taxes if you receive them without doing anything in exchange. For example, suppose airdrops are provided in return for your service/attention with cryptocurrency. In that case, they will be classified as regular receipts and thus subject to income taxes.
Crypto-based businesses may be liable for paying tax on income received through an airdrop. If their valuation increases after receiving the airdrop, an individual’s cryptocurrency holdings are taxable due to price changes.
What amount of Income Tax will you have to pay on the value of your cryptocurrency?
To figure out how much income tax you will be charged, you first need to determine what tax bracket you’ll fall into. The following are the brackets and their corresponding taxes for the year 2021/22:
|Band||Taxable income||Tax rate|
|Personal allowance||Up to £12,570||0%|
|Basic rate||£12,571 – £50,270||20%|
|Higher rate||£50,271 – £150,000||40%|
|Additional rate||£150,000 +||45%|
HMRC cost basis methods to cryptocurrency
HMRC has made it clear that crypto investors cannot manipulate specific tax laws to reduce their taxable income. This prevents people from manipulating the ACB (Adjusted Cost Base) when tracking gains and losses associated with trading on exchanges.
There are three possible methods you can use to value your asset. These costs, market, or income valuation techniques have pros and cons that you need to work through before going into this process.
- Same-Day Rule:
Suppose you sell or trade-in coins or supplies to shops that buy and sell vendor-related items. In that case, it’s important to remember that the cost basis of many things fluctuates daily. Therefore, if you happen to purchase something for a price lower than the market value on the same day, the basis for your calculations should be on this day.
- Bed and Breakfast Rule:
If you purchase any coins/tokens and sell them before the end of one month, you’ll use how much you bought them for at the start of this specific month to calculate your profits/deficits.
- Section 104 Rule:
Suppose you don’t fall into any of the categories described in the two rules above. In that case, you will have to use this other costing method to calculate your crypto taxes for tax purposes. Unlike the ACB, we discussed the one used to record every transaction and assign it a value that would later be averaged out. This ACB is slightly different since an average is computed based on the total money paid for all the assets and divided by the real coins/tokens you have instead.
Reporting Capital Gains and Losses on Your Tax Return
You must report both the gains and losses on your tax return for income. You can utilise them for two purposes:
* You could use them to cut down on any possible tax due in the coming year. They can be written off and reduce the tax burden later to recover the losses.
In addition, because the capital gain rules have changed over time, you could also be owed taxes that you haven’t yet paid. Utilise losses to offset gains in the future for yourself, and you can save even more.
What is the deadline to prepare an Income Tax Return to pay your UK cryptocurrency tax?
Suppose you’ve earned crypto to declare during the tax year from 6th April 2020 through 5th April 2021. In that case, you’ll have to file an auto-assessment tax form to HMRC at the beginning of January 2022. To make sure your account is in the right place, the records you keep should be with a list of all your purchase and sale transactions throughout the calendar year.
It’s vital that you keep an eye out for any income returns as well. Therefore, to be adequately prepared to see yourself facing any tax evasion penalties or even criminal charges, only undertake transactions through trading exchanges registered with HMRC.
HMRC will calculate any tax you owe when submitting the self-assessment tax return. Therefore, if you have any self-assessment tax returns due, you must pay by the end of January 2022.
Crypto tax breaks
UK crypto investors can pay less tax on their cryptocurrency investments thanks to new exemptions being given the green light.
- £12,570 Personal Income Tax Allowance:
The UK currently has a tax-free allowance of £12,570 that is called the “personal income tax allowance”. Therefore, it is essential to be aware of this when you calculate your crypto taxes and tax bands for income. Remember that you will not be eligible for the personal income tax allowance when you earn more than £125,140 per year.
- Trading and Property Allowances:
Suppose business has been good to you, and you’re making a decent amount of money trading goods. In that case, you may want to know that there’s an exemption of PS1,000 tax-free when it comes to income from property and trading. If this is the case, you are eligible for an extra allowance of £2,000 on top of that
- Capital Gains Tax-Free Allowance:
The UK offers a capital gains tax-free allowance of £12,300. This implies that the gains will not be taxed if you earn not more than £12,300 in capital gains during a calendar year.
Can HMRC track cryptocurrency
HMRC can track cryptocurrency, and they’ve been doing so since 2014. ” Connect ” system is part of HMRC and helps them collect data from all UK exchanges. A few years ago, an ICO or Crypto Capital scheme was set up as part of this program.
With Connect, every company or exchange will share their transaction details with HMRC upon request. For instance, when you sign up with a crypto exchange or any other service related to crypto within the UK. In this scenario, HMRC is very likely to have your KYC details.
HMRC has partnered with big crypto exchanges in the UK to share information about customers derived through KYC ID records. The data is then used to send out nudge letters to crypto investors, asking them to report their gains in crypto and whether they want to pay taxes this year.
Which cryptocurrency exchanges are reported to HMRC?
While researching, we found articles where UK-based Binance has reported to the HMRC. However, other exchanges in the UK, such as Coinbase, eToro and CEX, have requested HMRC to provide specific customer data. But Binance has not revealed any information about them reporting taxes in the UK.
Many more crypto exchanges and businesses involved in this industry have yet to be investigated, such as Binance, Kraken, KuCoin, Gemini, CoinJar, Crypto.com, Bittrex, and Gate.io. In addition, back in 2020, Coinbase has provided its UK based customer’s data to HMRC. As a result, they have transacted £5,000 worth of crypto between 2017 and 2019.
HMRC is anticipating the growth of cryptocurrency tax across the UK. Therefore, HMRC has classified and grouped cryptocurrencies into four main categories. These are as follows:
- Exchange tokens (Such as BNB, Binance’s native coin used on their blockchain)
- Utility Tokens (ETH, used on ERC-20)
- Security Tokens (BCAP, the very first security token)
- Stablecoins (USDT, USDC)
There are several other things to consider when paying UK tax on cryptocurrencies like Bitcoin, Ethereum, Ripple, the cost basis method and how the UK government treats mining. We hope this blog helped you understand the UK crypto tax law. If you want to know more, don’t hesitate to contact one of our crypto accountants or crypto tax advisors UK today. We would be happy to answer any questions you might have.