UK Crypto Tax Guide

Cryptoassets are digital representations of value or contractual rights that can be transferred, stored or traded electronically and are cryptographically secured. They are also called coins or tokens and include cryptocurrency that may be used for payments or held as an investment.

While there is no specific crypto tax in the UK, cryptoassets are still taxable and are mainly subject to income tax and capital gains tax.

The tax authority is called HM Revenue and Customs (HMRC).

You should not try to hide your crypto from them. When you open an account with the crypto providers, you send them the identification documents for AML purposes. Most of the crypto providers have data sharing programs with the state authorities including the HMRC. Thus it’s reasonable to assume that HMRC already knows about your crypto transactions. Tax evasion is a serious crime in the UK so always do file tax returns and show all your crypto income.

Another issue to consider with the crypto taxes is whether you are an individual or a professional trader. Most people buying and selling cryptocurrency will be regarded as individuals and are mainly paying capital gains tax on disposing of their cryptoassets. If crypto is your business, you will be subject to more complicated professional rules that might include corporation tax and VAT.

For the tax purposes, all your cryptoassets owned, sold, traded, acquired etc shall be valued in GBP – you shall use the exchange rate of the reputable crypto exchange as of the date of the event/transaction.

UK tax year lasts from April 06 until April 05 of the next year.

HMRC suggests the following deadlines for filing the documents and paying the taxes: you shall file the paper tax return until October 31, or online tax return until January 31 and pay tax you owe January 31.

There are two main obligations for the crypto tax subjects: report the gains and losses and pay taxes. These obligations are not always triggered at the same time by same events. You may need to report your gains, but does not need to pay tax. Or you may need to report losses only, without any tax applied.

The threshold amount equals to £12 300 for the tax year 2022 -2023.

If you have crypto gains less than £12 300 and have disposed assets for the amount less than £49 200 (£12 300 * 4), you don’t need to pay tax or file a tax return.
If you have crypto gains less than £12 300 and have disposed assets for the amount more than £49 200 (£12 300 * 4), you don’t need to pay tax but need to file a tax return.
If you have crypto gains more than £12 300, you need to pay tax.

The basic document you shall file is Self Assessment Tax Return.

There are two main taxes in crypto: income tax and capital gains tax. The borderline is the type of the transactions: income tax arises when the individual receives cryptoasset as earning, e.g. as a salary, or receives coins for mining activity, staking awards or airdrops.

Since HMRC treats cryptoassets as property rather than currency or money it means that every time you dispose of the cryptoasset, it triggers capital gains tax which is a tax on the profit when the disposed asset has increased in value.

You need to assess whether you got profit or loss and pay respectively.

Let’s start with an easy part – income tax. It applies to the crypto received e.g. as a result of mining, or from your employer. You will need to pay income tax plus National Insurance contribution. Some employers may pay taxes on employee’s behalf so check this with your employer. Another thing to consider is that CGT may arise when you sell the earned crypto with a profit.

Capital gains tax is a bit more complex than the income tax. It arises any time you dispose of the crypto. For the tax purposes, disposal means “getting rid” of your crypto by any of the following means:

• sell crypto for fiat currency;

Example: you buy Coin A for £3000 and later sell it for £4000. You'll need to pay tax on the resulting £1000 gain.

• swap, trade, exchange one coin to another;

Example: You bought 1 Coin A for £2000. You exchange 1 Coin A for 10 Coins B. The market value of 10 Coins B is £3000 at the moment. Since initially you paid £2000 to acquire Coin A, you use the following equation: £3000 - £2000 = £1000, which is your Capital gain for the tax purposes.

• use crypto to buy goods and services;
• gift crypto to anyone except for your spouse or civil partner. From tax perspective, gift is considered a disposal and thus triggers CGT under similar rules with other transactions.

CGT arises when any of the above events happen. However you may get a gain or loss as a result. If you have a gain – you may pay tax on it. If you have a loss – not only you don’t need to pay tax, but rather you can reduce your tax burden.

The gain equals to the difference between the amount you sold the assets for and the amount you paid for them. If the asset was acquired for free, you shall take the market value of the asset at the date of acquisition.

Next thing to consider is a tax-free allowance which constitutes £12,300 for the tax year 2022 – 2023. This means that you have to pay the capital gains tax only if your overall gains are above this threshold.

As we discussed above, when any of the events triggering CGT happens, you may have either a capital gain or a loss.

If you make a capital gain, you may pay tax on it. If you make a capital loss, it can reduce your capital gains in the current tax year and you can even carry it forward to the next years.

In order to calculate the tax due, you shall start with the beginning: you need to calculate your capital gains/losses.

Basically it’s the difference between the GBP equivalent of your crypto at the time you disposed of it and at the time you got it. If the result is more than zero – you have a capital gain for this asset. If it’s less than zero – you have a capital loss and you don’t need to pay the tax and can even reduce your cost base.

Capital gain/loss = sale price in GBP – purchase price in the GBP

If you disposed of your crypto otherwise than selling for GBP, you shall use the similar equation and take the data from the reputable exchange on the date of the relevant transaction (fair market value).

If your total taxable gains are within the tax-free allowance (which is £12 300 for the tax year 2022 – 2033), you don’t need to pay tax. However you still need to report your gains in the Self-assessment tax return, if the total amount of the disposed assets is more than £ 49 200.

If your total taxable gains are above £12 300 – you can deduct this amount from the gains and go further.

You shall then calculate your total taxable income and add the taxable gains to it. This amount will show which Income Tax Band you belong to. If you belong to the Basic tax band – you pay 10% on your gains. If it’s above the Basic tax band – you pay 20%.

Sound way too complicated? Let’s walk through an example.

Example: you have gained GBP 15 000 on crypto activity. Your taxable income is GBP 25000. First you shall subtract the tax-free allowance from the gains – £15 000 – £12 300 = £2 700. You add £2 700 to £25 000. It’s £27 700. This amount is within the Basic tax band (less than £50 270) which means the Capital Gains Tax is 10%. £2700 * 10% is £270. This is the amount of the Capital Gains Tax you are paying.

You shall also consider the losses you might have made in the past tax year. In our previous example imagine you have got £3000 loss from the previous year. £2700 – £3000 = -£300. This means that not only you don’t need to pay capital gains tax this year, but you can still have £300 loss to carry forward.

Now let’s take another example. You have bought 1 Coin A for £5000. Later you have bought another Coin A for £10 000. Now when you decide to sell one Coin A, Coin’s A value equals to £7000. Which of the coins A shall be accounted for the tax purposes? The first one or the second one? If we take the first one – you have £2000 profit. If we take the second one, you have a loss of £3000. This makes a serious difference. In order to sort it out, you shall have a fair treatment in such situations.

To calculate the right amount of gains or losses, HMRC has got the rule, initially introduced for the shares, called share pooling. Another reason for this rule is preventing the investors to benefit from claiming the losses by manipulating the average costs.

This rule works the following way. You shall first group the coins of the same type in one pool.

Next thing to consider is the timing: if you have acquired and disposed of the same coins within one day – you shall use the “Same day” rule; within 30 days – “Bed and breakfast rule”; other cases you use “Section 104 rule”.

You shall then calculate the items of the same coins in the pool and the total cost you have paid for them in accordance with the above 3 types of rules. By dividing the cost of items by the number of items you will get an average cost of each of the items. When you dispose of any of the coins from the relevant pool you simply take the difference between the average disposal proceeds and the acquisition cost.

HMRC suggests to follow the below order: you shall match the disposals against acquisitions of the same day; when the number of coins disposed is more than acquired that day – you match them against the coins acquired within the 30 days rule; and finally against the coins calculated in accordance with the Section 104 rule.

Example: you have acquired 10 Coins A in 2015 for £1000. Then 10 Coins A for £2000 in 2016 and then 10 Coins A for £3000. You have all in all spent £6000 for 30 Coins. Average cost is £200 which shall be used for the tax purposes when you decide to dispose of the Coins.

If you have disposed more than you have acquired within 1 day or 30 days, you shall use the first rule applicable and then move to the next one.

Example: You hold 5000 Coins A. You buy additional 500 Coins A December 01, 2021. You sell 3000 Coins A December 10, 2021. 500 Coins will be matched in accordance with the “Bed and breakfast rule” since they have been acquired and disposed of within 30 days. The remaining 2500 Coins will be calculated under “Section 104 rule”.

If your private keys are lost or you’re defrauded, it doesn’t mean you automatically have a loss. From HMRC perspective, you still have a chance to recover your loss or return stolen crypto. However if it ends up in vain, you can file a negligible value claim and eventually consider lost or stolen crypto as a loss.

In order to calculate the Capital Gains tax you shall first define your Income tax. The Income tax rate in the UK depends on your total income. If your taxable income is less than £12 570 – your tax rate is 0%, you don’t need to pay tax. If it’s from £12 571 to £50 270 – you pay 20%. £50 271 – £150 000 – 40 %. Above £150 000 – 45 %. The income ranges are called Tax Bands:

Depending on which Tax band you belong to in the current tax year, your tax rate for Capital Gains for crypto may be either 10% or 20%: 10% if your taxable income is within the Basic rate (up to £50 270) and 20% if it’s more than £50 270.

Although most of the transactions implies taxes, some are exempted. This might be the case if you:

Additionally, you can benefit from the below discounts:

DeFi transaction
As with other income-like events, when you earn new coins as a result of the DeFI transactions, you need to pay income tax. Whereas if you get capital gains on your coins within the DeFi platforms, you may be subject to CGT for making profit.

Mining
The so-called miners receive tokens as a reward for verifying transactions on a distributed ledger. If it’s not considered a business activity, then the GBP value of the coins received as on the day of acquiring will be treated as income and subject to income tax. When you later sell the mined coins, you may be subject to capital gains tax. Don’t worry about double taxation – this is not actually the case here. Imagine you mine a coin worth £ 1000. You need to pay income tax on this value. If you later sell it for £ 1500, you pay CGT on the difference between the initial cost and the cost of selling: £1500 - £1000 = £500 which is your gain and you will need to pay tax on it. However if you sell it for e.g. £500 only, your transaction results in a loss and you may reduce your other gains for this amount.

Staking
If you are treated as an individual, staking is subject to income tax at the value of the awarded coins. If you later dispose of them, CGT will be applied on the same rules as for the mining.

Airdrops
An airdrop is receiving some coins as part of a marketing or advertising campaign. Income tax will apply for the received coins unless you got them without doing anything in return (you didn’t provide for any consideration). If you performed any actions for receiving the coins – does not matter whether it’s just a retweet – the tokens will be considered your income and treated respectively. Note that in any case the disposal is subject to CGT.

Gifts
Gifts in the UK are taxable. If you gift a cryptocurrency to anyone except for your spouse or civil partner, it’s a taxable event equal to disposal. You will need to calculate the capital gain or loss and pay tax.

NFT’s
NFT’s are technically similar to usual cryptocurrency: they are the digital representations of value or contractual rights that can be transferred, stored or traded electronically and are cryptographically secured. The essential difference is that you can not use the share pooling rule since NFT’s are not identical and can not be pooled. Otherwise the tax treatment is the same. Income tax and Capital Gains tax are applied. When you issue an NFT as an artist and sell it – you will earn income and thus is obliged to pay income tax. If you buy and sell NFT’s as an investor, you shall pay CGT on the profit gained.

Transaction fees that you may pay to the cryptocurrency service provider are an interesting issue from tax perspective. You may pay a fee to the crypto provider for your transaction. However HMRC would consider the fee paid in crypto as a disposal and thus subject to CGT. You will need to pay tax if the resulted amount is a profit.

HMRC requires to keep records of all the cryptoasset transactions. It’s the tax payer’s responsibility. If for example the crypto exchange collapses, this won’t release you from this obligation and thus you are advised to record carefully all your data related to crypto.

It shall include at least:

Liability

Tax evasion is a serious crime. Violating the tax laws may result in imprisonment or big fines.