Kryptoskatt becomes a member of INATBA, opening up opportunities to innovate in the crypto taxes space, and simplifying legal compliances for crypto investors
The subject of taxes on crypto is one that’s barely touched upon in the digital verse. Because the focus is primarily on the gains from these assets, not on the liabilities they attract.
However, the conversations need to shift as major economies around the world tighten their grip on investors. With strict laws against tax evasion and tax fraud in place, not paying your crypto taxes can attract some unwanted legal complications.
But what if we told you that there are ways to avoid tax legally on crypto transactions, and some of them are even incentivized by the HMRC?
Our conversation today focuses on tax-saving strategies that can help you avoid taxes legally and utilize all the tax loopholes to minimize your taxes.
So let’s hop in…
Understanding crypto taxes in the UK
Although there are no specific crypto tax laws in the UK, the HMRC has issued guidelines provisioning the taxation of crypto. According to HMRC, crypto assets are subject to capital gains tax and income tax based on the nature of the transactions involving them. If a crypto asset is disposed of and that results in a capital gain, then the event attracts a capital gains tax.
The following transactions are counted as a disposal of a crypto asset:
- Selling crypto for fiat
- Exchanging one asset for another
- Trading in a crypto asset for another form of asset
- Gifting crypto, not involving your civil partner or spouse
And if you’ve received crypto as compensation for the sale of a product or service, or as recurring income from transactions involving crypto assets(staking, lending, yield farming), the event attracts income tax and is taxed at the rate of 10% or 20% depending upon your income levels.
How to avoid crypto taxes(legally) in the UK?
If you’re caught evading taxes in the UK, you could end up with 7 years in prison, not to mention the fines, penalties, and legal expenses. So if you’re considering not paying your crypto taxes this tax season, we advise you against it.
Moreover, there are strategies that you can employ to legally cut down your taxable income and pay lesser taxes. Let’s discuss them one at a time.
Use Tax Loss Harvesting
This is a popular tax loophole in UK. Tax loss harvesting refers to a strategy used by investors to offset their capital gains from the disposal of a capital asset against the losses incurred from the sale of another. Investors often intentionally close positions at a loss to offset their gains against it and reduce their taxable income.
It’s important to note that any loss incurred from wash sales is not considered to be a true loss by the HMRC and therefore cannot be used in tax loss harvesting. A wash sale is a term used to describe the event of selling and repurchasing an asset to create an imaginary loss in the process.
Utilize your tax-free allowances
Every Uk resident is offered a tax-free allowance, an amount that you need to surpass for your income to be taxable. This allowance is set to £12,300 per individual in the UK for crypto transactions till March 2023. However, this is scheduled to decrease to £6,000 starting in April 2023 and to £3,000 starting in April 2024. If the sum of all your realized gains is greater than the allowance, then the amount over the allowance limit will be subject to capital gains tax.
Let’s understand this through an example:
If Oliver bought 2 BTC at £5,000 and sold them at £15,000 at the end of 2022, then the total realized profit comes out to be £20,000, which is £7,700 above the allowance limit, so the excess amount i.e. will be taxable. Or Oliver can sell another token at a loss of £7.700 or more and bring his taxable income down to zero.
Gift crypto to your spouse
As mentioned earlier, the tax-free allowance of £12,300 is offered to every UK citizen and that goes for your spouse or civil partners as well. You can utilize your spouse’s unused allowance limit by gifting them some of your crypto assets. According to HMRC, crypto assets can be transferred between partners and their combined tax-free allowance can be used to offset the collective gains. The only catch here is that the partners should share the same household. This is another popular tax loophole in the UK.
Another way you can benefit from gifting your assets to your significant other is when they fall in a lower tax bracket than you. In that case, your spouse can dispose of your assets for you and attract a lower tax liability on the disposal than you.
One important thing to notice is that the tax-free allowance limit for crypto transactions will be progressively reduced by 50% starting April 2023.
Invest in your pension fund with crypto
Any income from transactions involving crypto assets attracts income tax from the HMRC and therefore can be invested in the SIPP or ISA to be availed after retirement. Despite being a possibility in the UK, it’s a complicated process and you need to explore this option in detail with your employer and financial advisor to better understand the benefits, and risks involved with the process. This is one of the safest ways to avoid tax legally in the UK.
Use Investment schemes to cut down on your taxes
If you’re sitting on a significant amount of unrealized gains in crypto assets and don’t want to pay capital gains tax on the income by liquidating your positions. You can invest in small businesses through government schemes like the Social Investment Tax Relief, Seed Enterprise Investment Fund, and Enterprise Investment Fund. It is one of the best ways to avoid paying taxes legally on your crypto assets
You can also consider investing in the venture capital trust offered by the government, where citizens with surplus funds can pool their assets and offer capital to emerging businesses in the country.
Given below are the tax benefits linked to these schemes:
Seed Enterprise Investment Fund
50% income tax relief
Enterprise Investment Fund
30% income tax relief
Social Investment Tax Relief
100% income tax relief
Donate crypto to charity
Your crypto donations are tax-deductible according to the HMRC and that’s good news because if you have amassed monumental gains in crypto assets and don’t want to give away a huge chunk of that gain as taxes, you can donate your crypto to a charity of your choice and use that donation as a deductible to reduce your table income.
It’s important to note that the charity should not be owned by someone related to you and the donation should not benefit you directly or indirectly. In case a relationship between you and the charity can be established, the donation cannot be counted as tax-deductible.
Use crypto tax software to track all your unrealized losses
Tracking all your crypto investments and the respective transactions that result in a capital gain can be a tedious task and often intimidating for individuals. And if you miss reporting some of your losses in your tax report, then you end up with an inaccurate tax report that overstates your liabilities.
One smart solution to this problem is to use crypto tax software like Kryptoskatt, which can auto-fetch all your transactions across all your profiles and accurately report all your losses to create an accurate tax report.
Frequently Asked Questions(FAQs)
- Is it possible to live in the UK?
It is possible to live in the UK without paying taxes, but it depends on your circumstances. The UK has a progressive tax system, which means that the more you earn, the more tax you pay. If you earn below a certain amount, you may not have to pay any income tax at all. Additionally, there are certain tax reliefs and exemptions that you may qualify for, such as a tax-free personal allowance.
However, if you are a UK resident for tax purposes and have income from sources such as employment, rental income, or investments, you are required by law to disclose your income and pay tax on it, regardless of the amount. Furthermore, most people will still have to pay other taxes such as VAT when they buy goods and services or council tax when they live in a house or flat.
- Is there any way to avoid paying taxes in the UK?
It is illegal to not pay taxes that you owe in the UK. Avoiding taxes, also known as tax evasion, is a criminal offence and can result in fines, penalties, and even criminal charges.
However, there are legal ways to reduce the amount of tax you owe, such as taking advantage of tax reliefs, exemptions, and credits available, planning your tax affairs efficiently, keeping accurate records, and filing your tax returns on time.
- How much tax do I pay on my crypto in the UK?
The amount of tax you pay on your crypto in the UK depends on your circumstances and the type of income or gains you have made from your crypto transactions.
In general, if you make a profit from buying and selling crypto, it will be subject to Capital Gains Tax (CGT). The rate of CGT in the UK is currently 20% for most taxpayers, but it can be as high as 28% for higher-rate taxpayers.
If you are using crypto as a means of payment for goods or services, it will be subject to Value Added Tax (VAT) which is currently 20%.
Also, if you receive crypto as a form of income, such as mining rewards or staking rewards, it will be subject to Income Tax. The income tax rates in the UK are currently 20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers.
- What happens if I don’t pay my taxes in the UK?
If you don't pay your taxes in the UK, you could face penalties and fines, and in some cases, even criminal charges. The specific consequences will depend on the severity of the non-compliance and whether it was done deliberately or by mistake.
The HM Revenue and Customs (HMRC) has the power to take legal action against individuals and businesses who are found to have deliberately evaded or failed to pay taxes. This can include fines, penalties, and even imprisonment for the most serious cases.