Cryptocurrencies like Bitcoin and Ethereum have been gaining attention of investors in recent years. While it's important to note that these digital assets are relatively new, and regulations are still being developed, HMRC have confirmed that they are taxable.

In the UK, whether you need to pay taxes on your cryptocurrency earnings depends on how you acquire them and the amount of profit you make. Your total income during the tax year will determine the rate of tax you will pay. In this guide, we've put together some essential information on cryptocurrency taxation in the UK, let’s get started with the question on everyone’s mind!

Is There a Crypto Tax in the UK?

In the UK, there isn't a specific tax solely for cryptocurrencies, however,cryptocurrencies are recognised as a type of property by HMRC. Individuals participating in crypto are caught by the existing tax laws and they may need to consider capital gains or income tax implications from their crypto activities.

Capital Gains Tax (CGT) 

CGT typically applies to individuals who buy and sell crypto assets as investments. When your net capital gains (including those outside of crypto) exceed the CGT Annual Exempt Amount (aka capital gains allowance) for the tax year, you're liable to pay CGT as an investor.

Income Tax (IT) 

On the other hand, rewards from crypto asset activities such as mining and staking are usually treated as taxable income and are subject to taxation at your regular income tax rate.

The amount of tax you owe on your crypto transactions depends on various factors, including the reward, type of transaction and tax applied.

When Is There A Capital Gains Tax Disposal of my Cryptocurrency?

Every time you dispose of a crypto asset you are creating a taxable event in the eyes of HMRC. Disposals subject to capital gains tax include:

• Selling crypto for fiat (GBP)
• Trading/swapping one crypto for another crypto
• Gifting crypto (excluding to a spouse or civil partner)
• Spending crypto.

Some DeFi transactions may also be subject to capital gains tax when a change in beneficial ownership takes place. For more detailed guidance take a look at Recap’s DeFi Tax Guide.

How Much Tax do You Need to Pay on Crypto Capital Gains?

When your total capital gains (from crypto and other property like stocks and shares) exceed the capital gains allowance, you will pay tax of 10% or 20% depending on your total income in the tax year. If your Basic Rate band is not fully used up with income, the unused amount can be used against capital gains for the 10% CGT rate.

UK CGT Annual Exempt Amount (Capital gains allowance)

UK Capital Gains Tax Rate

How to Calculate Capital Gains from Crypto?

To calculate the capital gain or loss when you dispose of a crypto asset you’ll need to know: 

• The matched cost basis of your crypto asset: in simple terms this is the cost of your crypto asset when you acquired it plus any transaction fees. However, the pooling and matching rules need to be followed to ensure the correct cost is matched against the correct disposal; and
  
  
• The disposal proceeds: the fair market value of the crypto asset when you disposed of it.

Simply subtract the matched cost basis from the disposal proceeds to work out your capital gain or loss.

You’ll need to follow this process for every crypto asset disposal during the tax year to calculate your net capital gains or losses.

What Happens if You Make a Loss on Crypto Assets?

Any losses realised on your crypto assets will be offset by your capital gains in the same tax year. When total losses in a tax year are higher than the capital gains, they are rolled forward to use against capital gains in future tax years.
To use them, losses must be claimed within four years of the end of the tax year in which they were realised. 

When Do You Need to Pay Income Tax on Cryptocurrency?

When you receive a return or reward from crypto, it’s likely income tax will apply. HMRC guidance suggests the following activity is likely to be taxed as income:

• Getting paid in crypto
• Mining rewards
• Staking rewards
• Liquidity pool rewards
• Lending rewards
• Some airdrops

How Much Tax Do You Need to Pay on Crypto Income?

Most crypto income needs to be reported as “miscellaneous income” and is subject to your normal  income tax rate, based on the sterling value when received with any allowable expenses deducted.  

Financial Trading in Crypto Assets

In very rare circumstances, some individuals are classed as “financial traders” for their crypto asset activity. When this is the case, instead of capital gains and miscellaneous income tax, profits are self-employed business profits, subject to income tax and national insurance. 

Trading Allowance

An annual trading allowance of £1,000 applies to both miscellaneous and trading income. If your total trading and miscellaneous income for a tax year is less than £1,000 and you have no other self-employment, there is no tax to pay on this income. If your total trading/miscellaneous income is above £1,000, then you can deduct £1,000 from your total income without needing to justify the costs. 

Employment Income 

If you earn crypto income from employment (either from an employer or through self employment) it is subject to income tax and national insurance based on the sterling equivalent at the date of receipt. When receiving crypto income from an employer the way tax and NI is collected depends on where they are based and the tokens received; so you should discuss this with them.

UK Income Tax Rates 2023-24

* The Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000.

Are Any Crypto Transactions Exempt from Tax in the UK?

Yes there are some transactions that are not subject to tax including:

• Buying crypto with fiat currency like GBP
• HODLing your cryptocurrency
• Gifting crypto to your spouse or civil partner
• Gifting to a qualifying charity
• Transferring your own crypto between your own accounts and wallets

Can You Reduce Your Crypto Tax in the UK?

As an investor you are responsible for paying the appropriate tax on your crypto, however there are some ways to legally minimise your tax bill.

1. Be aware of tax thresholds: some textsome text
   1. Capital gains allowance (currently £3,000) - gains under the annual exemption amount are tax free.
   2. Trading allowance - £1,000 of tax free miscellaneous or trading income.
2. Take profits in a low income year when your tax rate is lower.
3. Realise cryptocurrency losses to offset capital gains in the same tax year.
4. Donate crypto to a qualifying charity or body - you’ll be eligible for tax relief on capital gains realised. 
5. Gift crypto to your spouse or civil partner - this is tax free. You could essentially pool your tax thresholds and use their capital gains allowance to realise a gain tax free. 

How to File Your Crypto Taxes in the UK

In the UK, reporting crypto taxes is part of the annual self-assessment process, with a deadline of midnight on 31st January for both filing and paying. The UK tax year spans from 6th April to 5th April the following year, and filing opens at the beginning of the new tax year, giving you ample time to prepare and file before the deadline.

• Capital gains and losses from crypto activities should be combined with gains and losses from other sources, such as property and shares. These should then be reported on the Tax Return using the Capital Gains Summary SA108 supplementary pages.
• Miscellaneous income derived from crypto should be reported as 'Other taxable income' in Box 17 of the SA100 Tax Return form. Any allowable expenses, including the trading allowance if applicable, can be reported in Box 18.
• In rare cases, where an individual's crypto activity is classified as financial trading, it should be reported on the Self-Employment pages of the tax return. 

How to Prepare for UK Tax Season

Calculating your crypto taxes can be extremely daunting especially for first time filers, so here’s some tips:

1. Get on top of record keeping for your crypto transactions:

You’ll need records of all your crypto activity including historical transactions to ensure your crypto tax calculations are accurate and you don’t end up under or over paying.

2. Use a suitable crypto tax calculator:

Calculator tools like Recap make calculating tax on your crypto simple and are especially useful when you have a lot of transactions. Simply connect your accounts or add csv data and the software applies fiat valuations and applies the appropriate tax treatment to your transactions to generate your crypto tax report. 

3. Consult a tax professional:

Crypto tax is confusing, even more so if you’re in DeFi, NFTs or have complex trading history so getting specialist crypto tax advice from an accountant is invaluable. As well as helping you navigate filing your tax return many will also be able to help you with tax strategies to lower your tax bill. 

4. Understand and stay updated on the latest crypto tax guidance:

Crypto is evolving quickly and so is regulation - ensure you know how your crypto activity is taxed by staying informed with resources like Recap’s UK crypto tax guide. 

The information provided in this article is for general informational purposes only and should not be construed as financial or tax advice. We recommend consulting with a qualified tax advisor or financial professional who can provide personalised advice tailored to your specific circumstances.