
Navigate the complexities of crypto taxes in the Netherlands with our comprehensive guide. From reporting obligations to deductions, learn how to minimize your tax liability and maximize your crypto gains.
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.Â
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 itâs unfair, and thatâs why we curated this comprehensive crypto tax guide for anyone who doesnât 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 letâs start with the basics.
The answer is Yes.Â
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.
Citizens in the UK have to pay taxes if they are involved in any one or more transactions involving crypto:
As mentioned earlier, the apex tax authority of the UK known as Her Majestyâs 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.Â
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.
Just like any other tax in the UK, capital gains tax is also progressive, meaning that you donât 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 ÂŁ12,300, which means that if you have a capital gain of less than ÂŁ12,300, you donât have to pay any capital gains taxes on the amount.Â
However, the government recently announced that the allowance for the tax year 2023-2024 will be reduced to ÂŁ6,000 and will be further reduced in the tax year 2024-2025 to ÂŁ3,000.Â
Youâll 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.Â
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 letâs 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.
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.
Hereâs 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:
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 youâll 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 HMRCâs share pooling framework.Â
Generally, there are two types of forks in a blockchain network. The first is a soft fork, where you donât receive new tokens and the second is a hard fork, where you end up with ânâ new tokens for every token held previously.Â
According to HMRCâs guidelines, soft forks donât 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 transactions are a grey area in HMRCâs 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).Â
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.
Hereâs a list of De-Fi transactions and how they are taxed:
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 youâre thinking about your privacy, rest easy because Kryptoskatt doesnât collect or store your personal information and follows the strictest security standards. The website and the database are secured using advanced socket layer protection.
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There are strategies that you can employ to legally reduce your taxable income and pay fewer taxes. Here are some ways to do that:
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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.
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No, you are not required to pay any taxes on crypto that youâve bought and have not yet sold.
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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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