Love ’em or hate ’em, cryptocurrencies such as Bitcoin and Ether inch closer to the mainstream eye year after year. Despite the endless “Bitcoin is dead” claims, the emerging (and highly volatile) asset class seems to be here to stay. Like any investment though, UK citizens have to pay tax on cryptocurrencies trades. So we put together this comprehensive guide on crypto tax in the UK and how they work.
The Basics: What Counts as Cryptoassets?
According to HMRC, “cryptoassets” are defined as cryptographically secured digital representations of value or contractual rights that can be transferred, stored, and traded electronically. HMRC distinguishes cryptoassets from currency or money and they are instead treated as exchange tokens or security tokens, rather than a form of currency.
HMRC has identified three major types of cryptoassets:
- Exchange tokens – Exchange tokens are used as a method of payment and include most of the popular cryptocurrencies such as Bitcoin and Litecoin. The value that these kinds of assets have comes from its use as a means of exchange or investment.
- Utility tokens – Utility tokens grant the holder rights to access particular goods or services. Businesses may issue tokens and accept those tokens to pay for goods or services.
- Security tokens – Security tokens provide the holder with some claim over business interests, such as debt or share of profits in the business.
HMRC identifies each form of cryptoassets but also notes that utility and security tokens may be subject to different tax treatment depending on the specific nature of the asset.
Regardless of the kind of cryptoasset you own, it is not considered money or currency by HMRC. They are instead treated like personal investments and have a similar tax treatment as investments.
When Do I Pay Taxes on Cryptoassets?
If you hold cryptoassets as a form of personal investment, then you will have to pay a capital gains tax whenever you dispose of that asset. “Disposal” involves any action where the cryptoasset changes hands which includes things like selling assets for money, exchanging cryptoassets for other forms of cryptoassets, gifting cryptoassets to another person, and using cryptoassets to purchase goods and service.
As far as the taxes go, capital gains tax for cryptoassets are calculated exactly the same way as they are for traditional assets like stock. Capital gains refer to the difference between the acquisition cost of the asset and the net proceeds from the disposal of that asset. In other words, capital gains are equal to the difference between the sale price and purchase price.
In the UK, capital gains tax is based on your income. If you are in the basic income bracket then the amount of tax you have to pay depends on the size of the capital gains and your net income. If you are a higher or additional rate taxpayer then the capital gains tax rate is 20%.
If you run a business that deals with cryptoasset transactions then the story is a bit more complicated. Those who run businesses that deal with cryptoassets may be liable to pay capital gains tax, corporation tax, income tax, national insurance contributions, Stamp tax, and VATs.
The exact kind of tax you will have to pay depends on who works in the business and the kind of activities it performs. These taxes are determined by income, expenditure, profit, and gains. Business owners must report these metrics to HMRC on an annual basis.
It is possible that individual cryptotraders may be treated as a business by UK tax law. If your activity is comparable to that of a business, then you may be held accountable under business tax laws with respect to your cryptoassets.
Specifically, HMRC will determine the difference based mostly on the frequency of buying and selling assets. If the frequency is high enough, then an individual person may be considered a business entity and then income tax would apply to profits and losses, just like any other business.
How to Calculate Crypto Capital Gains
Since cryptoassets are considered intangible, HMRC calculates asset costs using a pooling method. The method essentially adds up and average the cost of purchasing the cryptoassets to determine the cost basis.
Here is an example to illustrate what we mean. Say you buy 2 Bitcoin for £1,000 and then later buy 1.5 Bitcoin for £2,000. That means your total pool of Bitcoin is (2 + 1.5) = 3.5 and your total allowable costs are £3,000 (because you spent £3,000 buying all the Bitcoin.)
Now say you sell 0.5 Bitcoin for £3,500. Here is how you would calculate the capital gains on that transaction:
£3,500 – (£3,000 x (0.5/2.5)) = £2,900.
So your total capital gains on that transaction would be £2,900.
In other words, when calculating capital gains from crypto sales, you need to multiply the total amount of money you spent on bitcoin (allowable costs) by the ratio of what you sold to how much Bitcoin you have in total, then subtract that entire amount from how much you sold the Bitcoin for. This method essentially requires you to pay capital gains tax that are proportional to your total pool of Bitcoin.
Here is a general formula to keep in mind:
Total Capital Gains = Sale Price – (Allowable costs X (Amount of Bitcoin Sold/Total Bitcoin Pool))
From there, all you have to do is multiply your total capital gains by the capital gains tax percentage for your tax bracket. So using our previous figure, if your capital gains for your transaction is determined to be £2,900 and you make below £50,000, then you would have to pay 10% (£290) in capital gains tax. If you make more than £50,000 then you’d have to pay 20% (£580) in taxes on that transaction.
Keep in mind that these crypto capital gains tax will apply anytime you sell cryptoassets. This includes trading one form of cryptoassets for another form of crypto. In that case, the value of the new crypto will be considered the sale price.
So for example, say you bought 0.5 Bitcoin for £1,000 then later trade it for 2 Ether valued at £1,700. In that case, the sale price is £1,700 and your cost basis is £1,000 so the total gains from that transaction would be £1,700 – £1,000 – £700. This is the amount (in pound sterling) that you would have to report to HMRC.
How Does The “Bed and Breakfast” Rule Apply?
Same-Day and 30-Day rules apply to crypto trades just like they do trading shares. So, if you sell crypto and acquire another on the same day, then the cost basis for that transaction will be equal to the cost of acquisition for the new cryptoasset, even if you technically bought the new asset before selling the older one.
Similarly, any crypto that you purchase within 30 days of selling another one will be counted in the cost basis.
The purpose of these rules is to prevent “wash sales”—selling off investments near tax time to lower your overall tax burden. Otherwise, investors could just sell off crypto right before tax time to lower their tax burden, then immediately buy the assets again after tax time has passed.
Offsetting Crypto Capital Gains
Just like with regular shares, investors can offset their trading profits by selling crypto at a loss. This loss must be reported to HMRC first though before reporting any gains. Capital losses have a 4-year limitation for claiming.
In the case where someone has bought a crypto that has become worthless or now has “negligible value,” the investor can file a negligible value claim, which treats the asset as if it had been disposed and re-purchased Thus, you can write off losses for now-illiquid assets.
Taxes on Mining Crypto
Mining crypto involves verifying crypto transactions and adding them to the blockchain ledger. Mining crypto can be seen as analogous to mining precious metals: where payout of the process is in valuable crypto tokens.
Crypto mining activity will be taxed depending on if it is just a hobby or if the government considers it a full-fledged business. This depends on several factors such as how much mining activity you are performing, risk, organisation, and commercial gains, among other factors.
If your mining is just a hobby, then you will have to count any income from mining under “miscellaneous income”.
In this case, income is equivalent to the fair market value of the crypto when you acquire it. You will also need to pay the National Insurance Contribution on these kinds of transactions. Miscellaneous income is taxed just like regular income tax so all you have to do is apply your tax bracket percentage to the value of cryptoassets you gain from mining.
If your mining is classified as business activity then any income from mining will be considered trading profits and will be taxed as income. Any fees and rewards from your mining activity will also be counted as business income and treated under income tax rules.
The UK government does not explicitly define how much mining activity you have to be doing to be considered a business rather than an individual, but the designation is related to the frequency and the total value of mined assets, among other metrics.
Hard Fork and Airdrop Taxes
Hard forks are when a cryptocurrency splits into two separate assets and the original holder receives both assets. Since the value of the new asset is derived from the value of the original asset, hard fork gains are not subject to income tax (because it has already been accounted for by the original crypto.
That being said, the new crypto is added to a new crypto pool and the deductible costs will be split between the two.
Airdrops are when an individual receives crypto, for example, as a part of a marketing campaign. If the crypto was given without a service provided and the receiving entity is not a business or trader, then income tax does not apply to airdropped cryptoassets. Keep in mind though that disposing of airdropped cryptoassets will be subject to pay capital gains tax, just like normal crypto disposals. Business entities will be subject to income tax on any airdropped cryptos. and must pay National Insurance Contribution.
Taxes on Crypto Gifts and Donations
If you gift a cryptoasset to someone who is not your spouse or civil partner then the market value of the crypto will be considered the sales price for capital gains. You will have to determine the market value of the crypto asset on the day that it is given away. Additionally, if income tax has already been applied to the gifted cryptoasset then the actual sales proceeds will be reduced by how much has already been subject to income tax.
In the case of cryptoasset donations, donors can get some tax relief on their income. Alternatively, they can avoid capital gains taxes unless the donated crypto asset was currently valued higher than its acquisition cost or if the donation comes with certain financial advantages or kickbacks. In these cases, donors may need to pay taxes on cryptoasset donations.
Taxes on Crypto Income
If your employer or freelance clients pay you in cryptoassets then it will be taxed like normal. You will need to pay income tax based on the value of the cryptocurrency when you received it. As is always the case, any disposals from this crypto income will be subject to pay capital gains tax.
So for example, if you got paid £700 worth in crypto from your employer, then you would simply add £700 to your total income for that tax year.
Taxes on Crypto Pension Contributions
Since cryptoassets are neither considered money nor currency by HMRC, you cannot make tax-deductible contributions to your pension scheme with them. However, HMRC may change these rules in the future as crypto investing for retirement becomes more popular in the UK.
How to File Crypto Taxes
Any calculation of cryptoassets value for taxation is performed in pounds sterling. If any particular asset does not have a pound sterling value then the asset must be converted to pound sterling using an appropriate exchange rate.
In order to file crypto taxes, you will first need to take a look at all of your cryptoasset transactions over the past fiscal year. It is very important to assign the appropriate market rates for any disposals or trades of cryptoassets. Once you take stock of all your transactions and disposals, you will have to calculate the capital gains tax with the pooling method we mentioned earlier (make sure you convert all values to pound sterling first!)
From there, you will have to get the appropriate forms and fill out the information. If you are registered using your UTR (unique taxpayer reference) then you can file crypto taxes online, just like you would regular taxes.
It is very important to make sure that you account for all transactions and exchanges. Also, make sure that withdrawals from one account match deposits in another account. There is no tax for moving assets between accounts but you need to keep track of them. That way, HMRC does not count those transactions as disposals. So, you should make sure that you get accurate reports from all of your crypto exchanges about your activity before reporting them to HMRC.
The tax year in the UK begins on April 6th and goes to April 5th the next year. So you will need to file your tax return for the previous year to HMRC between those dates.
What Happens If I Don’t Report Crypto Taxes?
According to HMRC, those who do not report gains and losses from trading may be liable for a 20% capital gains tax and interest and penalties that could total up to 200% of taxes due. Tax evasion can be met with criminal charges and even jail time. In the UK, the maximum penalty for tax evasion is 7 years in prison or an unlimited fine.
As of 2019, HMRC announced that it was cracking down on cryptoasset trades who do not report their gains. The government has been collecting user info from crypto exchanges to track down individuals who are skirting the system.
All of this is to say you definitely should file taxes to HMRC for your crypto gains. If you have not filed for these gains in previous years with HMRC, you can file an amended self-assessment return to fix any discrepancies.
Cryptoassets are a valuable new kind of investment vehicle and as such the government has a vested interest in taxing gains from crypto trading. Unfortunately, the technology is still very new so HMRC has not had enough time to fully catch up. As such, there are several loopholes and blind spots in UK tax law where it is not clear how some cryptoassets should be handled. If you need to account for crypto income in your taxes, we would highly recommend meeting with a tax professional to get expert advice.
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