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Ultimate Crypto Tax Guide for United Kingdom
By
Pratibha Tiwari
On

According to a recent report, 6.2% of UK adults hold cryptocurrency, a whopping 4.2 million people. And if you happen to be one of these individuals, you might have to report these transactions to the HMRC and pay crypto tax in the forthcoming tax cycle that starts on April 6 and ends on April 5 next year. 

Crypto taxes are intimidating for most people, and they have to rely on tax experts and pay hefty service charges to file their taxes. We feel that it’s unfair, and that’s why we curated this comprehensive crypto tax guide for anyone who doesn’t have the time to read the entire crypto assets taxation guide issued by the HMRC and wants to understand how crypto taxes work in the UK.

So let’s start with the basics.

Are crypto transactions taxable in the UK?

The answer is Yes. 

The United Kingdom started taxing cryptocurrency transactions back in 2014 when the UK government issued a notification stating that profits from buying and selling cryptocurrency would be subject to capital gains tax. This notification clarified that cryptocurrency would be treated as property for tax purposes rather than a currency. In addition, cryptocurrency mining and trading were also made subject to tax, with the income from these activities subject to income tax and national insurance contributions.

Instead of issuing new tax laws to include crypto into the tax regime, HMRC has been consistently updating the existing tax laws to accommodate crypto transactions since 2018. The latest revisions dated 3rd February 2022 tweaked the current guidelines to accommodate De-Fi transactions into the tax infrastructure. We will revisit this later in the blog.

When do citizens have to pay taxes in the UK?

Citizens in the UK have to pay taxes if they are involved in any one or more transactions involving crypto:

  • Buying and Selling Crypto- This one is pretty straightforward if you have bought cryptocurrencies and disposed of them at a price higher than what you paid to acquire them resulting in a capital gain, then you have to pay taxes on them. 
  • Accepting Compensation in Crypto- If you’ve sold a product or offered a service in exchange for compensation paid in crypto, that will be counted as an income by HMRC and will be taxed according to the regular tax slabs.
  • Crypto Mining and Node Validation- If you own a mining business in the UK, the mining rewards are added to the trading profits of the business and taxed under the income tax laws. While if you are a part-time miner using excess computing power for marginal mining operations, you will have to pay taxes on the gains incurred in the process.
  • Airdrops- Airdrops are like a gift from the crypto gods, and as long as you don't have to trade or mine for them, they won't be taxed as income. But if you've worked for them, they'll be treated like regular income. And just like any other valuable asset, if you choose to part with your tokens, it will result in a capital gain tax event.
  • Inherited Crypto Assets- HMRC treats crypto as property; therefore, any crypto inheritance will be taxed accordingly.
  • De-Fi Transactions- Defi taxes can be complex, with different protocols treated differently by the UK's tax agency, the HMRC. Lending or staking tokens may be considered capital gains unless the return is known. Income is considered if paid by the Defi protocol. Other factors also affect how Defi is taxed under UK law.

How is crypto taxed in the UK?

As mentioned earlier, the apex tax authority of the UK known as Her Majesty’s Revenue Service(HMRC) doesn't consider crypto as a separate asset class and considers it to be property(a form of capital asset).

There are two separate crypto tax scenarios in the UK. Crypto taxes can be categorized into Capital gains tax and Income tax, depending upon the nature of your transactions. 

For instance, if you bought, or received crypto tokens and disposed of them later to avail a profit, then the transaction will be categorized as a capital gains transaction and will consequently fall into the capital gains tax category. However, if you have exchanged a product or a service for crypto assets, that will be counted as income and will therefore fall into the income tax category.

Crypto-Capital Gains Tax 

According to the HMRC notification, crypto is considered a capital asset, and therefore disposal of crypto assets attracts a capital gains tax. If you buy, sell, spend, gift, or trade crypto assets using an exchange from your account or a digital wallet, you owe capital gains tax to HMRC. 

Just like any other tax in the UK, capital gains tax is also progressive, meaning that you don’t have to pay taxes on the entire amount but only the gains. Moreover, the UK government has been quite generous with capital gains taxpayer allowance of £12,300, which means that if you have a capital gain of less than £12,300, you don’t have to pay any capital gains taxes on the amount. 

However, the government recently announced that the allowance for the tax year 2023-2024 will be reduced to £6,000 and will be further reduced in the tax year 2024-2025 to £3,000. 

You’ll only have to pay taxes when your gains are above the allowance amount. You can gift crypto to your spouse in case they have an unused capital gains allowance. 

Crypto-Income Tax

Crypto transactions are taxed as income when a business or an individual exchanges a product or a service for payments involving crypto assets. Staking rewards, mining rewards, and airdrops are also considered an income and hence entail income tax.

However, the segregation of capital gains transactions from income transactions can be complex for some people to understand. So let’s take an example:

If Mike trades crypto assets from his account on one of the crypto exchanges, he/she will most likely fall into the capital gains tax category. However, if Mike offers this service to other individuals, or an institution and trades crypto from their account in return for a percentage of the profit, this will be flagged as income and will attract income taxes.

Income generated through crypto is included in your income tax, which ranges from 0% to 45% depending on your tax bracket in England, Wales, and Northern Ireland. For those in Scotland, there are two additional tax bands, a 19% starter rate and a 21% intermediate rate.

What is the Crypto Tax Rate in the UK?

In case of compliance with the income tax standards, your net profits will be taxed based on your tax bracket at rates of 20%, 40%, or 45%, as well as national insurance at 12% and 2%.

In the case of capital gains taxes, gains above the allowance will be subject to a 10% tax rate up to the basic rate band and a 20% tax rate for gains in the higher and additional rate bands.

Are any Crypto Transactions Tax-Free?

Here’s some good news for people looking for tax-saving opportunities in the UK. Not all crypto transactions are taxable according to the HMRC. Here are some crypto transactions that are non-taxable in the UK:

  • Buying crypto with fiat.
  • Buying and Holding crypto.
  • Transferring crypto assets from one wallet to another.
  • Donating crypto.
  • Gifting crypto to a spouse.

How to Calculate Crypto Gains and Losses?

The logical first step towards calculating your crypto gains or losses is to find out your cost basis(the price paid to acquire an asset). Once you have the cost basis, you can subtract it from the price of the asset while disposing of it, and what you’ll end with is your capital gain or loss.

Now there are three methods to calculate your costs basis depending on the nature of your transactions according to HMRC’s share pooling framework

  1. Same-Day Rule: When determining your gains or losses from buying and selling coins on the same day, you should use the cost basis from that day. If you sold more than you bought on that day, then proceed to the next rule.
  1. Bed and Breakfast Rule: When calculating your gains or losses from selling and repurchasing the same coins or tokens within 30 days, you should use the cost basis of the coins or tokens you bought during that month. If you sold more than you bought during that month, then proceed to the final rule.
  1. Average Cost Basis(Section 104) Rule: If neither of the previous rules applies to your crypto transactions, you should use the cost basis method for calculating your crypto taxes. This method, similar to the ACB method, involves calculating an average cost basis for a group of assets by dividing the total amount paid for all assets by the total number of coins or tokens held.

What are the tax liabilities in case of a fork?

Generally, there are two types of forks in a blockchain network. The first is a soft fork, where you don’t receive new tokens and the second is a hard fork, where you end up with “n” new tokens for every token held previously. 

According to HMRC’s guidelines, soft forks don’t attract any tax liabilities. However, hard forks are a different story. The cost basis for every token received from a hard fork is calculated from the tokens held before the fork, to make sure that the disposal of tokens received attracts capital gains like any other token.

In simpler terms, you have no tax liabilities until you dispose of the tokens received in the hard fork, but as soon as you do, it attracts capital gains taxes(the cost basis being the price of acquisition of the token held before the fork).

De-Fi Crypto Taxes in the UK

De-Fi transactions are a grey area in HMRC’s comprehensive crypto asset tax guide, despite the recent updates and revisions. From what we could grasp after going through the notifications. De-Fi transactions are taxed depending upon whether they are seen as a disposal(capital gains tax) or an income source(Income tax). 

The rewards received from staking crypto assets and adding or removing assets from liquidity pools are considered as disposal, while recurring returns in the form of liquidity rewards from a De-Fi protocol are characterized as an income source.

Here’s a list of De-Fi transactions and how they are taxed:

  • Lending/loaning crypto(P2P or De-Fi)- CGT
  • Interest payments from crypto lending- CGT or IT based on the nature of the transaction
  • Disposing or Swapping NFTs- CGT
  • Buying NFTs- CGT if bought with crypto, none otherwise
  • Crypto-Backed Loans- CGT upon repayment
  • Staking rewards from Defi protocols- CGT/IT depending on the nature of transactions
  • Yield farming rewards from Defi protocols: CGT/IT depending on the nature of transactions

What’s the easiest way to file taxes in the UK?

The most difficult part of filing your crypto taxes is to keep track of all your transactions across all avenues(exchanges, wallets) to accurately calculate your cost basis. The likelihood of missing out on unrealized losses while doing everything manually is high, which might result in an inaccurate tax report.

Moreover, you might miss out on tax-saving opportunities due to a lack of awareness regarding local tax rules and tax-saving strategies like pension fund investment discounting. A smarter approach to filing your crypto taxes in the UK would be to use a smart crypto tax software like Krytoskatt, which automatically generates a legally compliant tax report by auto-fetching all your transactions and cross-referencing them with your regional tax laws. All you need to do is connect all your digital wallets and exchange profiles on the website.

And if you’re thinking about your privacy, rest easy because Kryptoskatt doesn’t collect or store your personal information and follows the strictest security standards. The website and the database are secured using advanced socket layer protection.

Frequently Asked Questions(FAQs)

  1. How to minimize your crypto taxes?

There are strategies that you can employ to legally reduce your taxable income and pay fewer taxes. Here are some ways to do that:

  • Use your capital gains taxpayer allowance
  • Gift crypto assets to your spouse with an unused capital gains allowance
  • Invest in a pension fund with crypto
  • Invest crypto in the opportunity-zone fund
  • Use a crypto tax calculator to account for all the losses
  • Use tax loss harvesting to offset losses against gains

  1. Do you pay taxes on lost or stolen crypto?

In the United Kingdom, you are generally required to pay taxes on any capital gains you make from the sale or disposal of your crypto assets. Including any crypto assets that you may have lost or stolen. However, you may be able to claim a loss on your taxes for lost or stolen crypto if you can demonstrate that it was indeed lost or stolen and that you have taken reasonable steps to try and recover it.

  1. Do I Pay Taxes on Crypto If I Don't Sell?

No, you are not required to pay any taxes on crypto that you’ve bought and have not yet sold.

  1. Do you pay taxes when you buy crypto?

In the United Kingdom, you are not required to pay taxes when you buy crypto. However, you may be required to pay taxes on any capital gains you make from the sale or disposal of your crypto assets.

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