Crypto Taxes in the UK: An In-Depth Guide
Crypto taxes in the UK are pretty similar to that of the US –
Capital gain taxes on disposal of cryptocurrency and income taxes on crypto received as income or revenue.
There are, however, some key distinctions between the two kinds of transactions. More importantly, it’s critical to understand how HMRC expects you to calculate and report your taxes, and in this guide, you’ll learn all about it and more.
How Does HMRC View Cryptocurrency
HMRC (Her Majesty’s Revenue and Customs) haven’t clarified its stance on cryptocurrency. So far, all we know is they don’t consider crypto as currency or money. Instead, they treat crypto as a capital asset or property for tax purposes.
How is Crypto Taxed in the UK?
Crypto taxes in the UK consist of capital gain taxes and income taxes.
Capital Gain Taxes
Whenever you sell, spend or swap crypto, in other words, dispose of your crypto assets, you’ll trigger a capital gain tax event.
In case you realize a gain, you’ll pay a 10-20% tax rate on your profit. However, the first £12,300 is tax-free for UK taxpayers under the Annual Exempt Amount.
In case you realize a loss, you can use it to offset your gains and reduce your net taxable gain. There is no limit on how much you can offset nor any time limit, meaning you can carry forward your losses indefinitely.
But make sure you report your losses within the first four years of incurring them. Otherwise, you can’t claim those losses.
Income Taxes
When you receive crypto as a form of payment or income, you’ll be subject to income tax rates ranging from 0% to 45%. Crypto mining or getting paid in crypto are some examples where you’re liable to income taxes.
Much like capital gains, you also receive a personal allowance of £12,570 for your taxable income, meaning anything earn below that is tax-free.
Keep in mind that you’ll pay taxes twice when receiving crypto as income – income taxes on receiving the crypto and capital gain taxes when you sell them in the future.
Taxes on DeFi Transactions
Very recently, HMRC released dedicated guidelines for DeFi, making the UK probably the first government to put out specific taxation guidelines around DeFi.
Anyways, here’s how taxes on DeFi taxation works. Whenever you’re adding liquidity or lending crypto in a DeFi protocol, in other words, exchanging your crypto for a token of proof, you’re triggering a disposal event. Hence, you’ll be subject to capital gain taxes.
Even though you technically still hold ownership of the coin, HMRC sees it as disposing of one cryptocurrency to acquire another.
On the other hand, receiving periodical, consistent and perhaps committed rewards or interests from the facilitator (DeFi protocol) will make you subject to income taxes.
That said, HMRC still left many nuances and exceptions undiscussed and unaddressed. But for now, this is the best we have.
How to Calculate Crypto Taxes in the UK
Calculating crypto taxes in South Africa is usually simple. You subtract the cost basis of your crypto by its selling price to calculate the gain.
Cost basis – Fair Market Value (or Selling Price) = Gain/Loss
The UK follows the ACB method to calculate the cost basis of your assets.
How does the ACB method work?
It’s easy. You just divide the total cost of the crypto you hold by the number of coins you hold of that cryptocurrency.
Since one can easily exploit the ACB method to manipulate their cost basis, hence, their taxes, HMRC has some specific rules in place to prevent taxpayers from practicing wash sales.
What is wash sales?
It’s when you sell crypto to realize a loss and quickly purchase it again to retain ownership and harvest losses simultaneously. You can say it’s an extension of the tax-loss harvesting strategy.
Now, coming back to it, the HMRC prevents wash sales with the Same Day Rule and Bed and Breakfasting Rule. Basically, both rules state that if you buy and sell (or sell and buy) crypto on the same day or within the same month, you’ll use the cost basis of the coin on that month or day to calculate gains and losses.
For example –
Suppose you sell 5 BTC for £10,000 on July 5.
On July 16, you buy 5 BTC for £9,000 again.
Now, since you have sold and bought the same crypto asset within a month, the Bed and Breakfasting Rule applies, according to which the cost basis of those 5 BTC would be £9,000 again. Therefore, you would realize a capital gain of £1000.
And as for calculating income taxes –
You pay income tax rates on the fair market value (FMV) of the crypto at the time of receiving it. So, if you receive 3 ETH as payment for a service and at the time of receiving, the FMV of 3 ETH is £2500, that would become your taxable income and you would pay income tax rates on it.
Pretty simple and straightforward, right? If it’s not, use a crypto tax tool like Bitcoin.Tax that will do all of this for you on autopilot.
Crypto Taxable Events
The following are some common and frequent crypto transactions and their tax implications.
Selling or Spending Crypto
As we established before, when you’re selling or spending your crypto, you’re essentially disposing of them. Hence, attracting capital gain taxes.
Swapping Crypto
Since swapping one cryptocurrency for another is also seen as a disposal event, its tax consequences follow the same logic as the previous taxable event.
Getting Paid in Crypto
If you’re getting paid in crypto for any service or product you sell, it’s essentially the same if you would have received your income in fiat currency. All you have to do is calculate the FMV of the crypto you receive at the time of receiving it and pay income tax rates on it.
But remember, you’ll pay capital gain taxes when exchanging your crypto for fiat currency, in other words, selling it.
Mining Crypto
Mining rewards earned from crypto mining are also treated as ordinary income in the UK. Therefore, it follows the same tax logic as the previous taxable event.
Staking or Lending Rewards
If you’re staking or lending crypto in a DeFi protocol and receive a token in exchange for your original cryptocurrency, you’ll pay capital gain taxes.
Rewards/Interests from DeFi Protocols
And rewards or interest earned from DeFi protocols will be treated as income. Hence, it will be subject to income taxes.
Airdrops
Airdrops are a little tricky. But as a general rule of thumb, if you complete any kind of tasks (like sharing on social media), survey or anything to receive the airdrop, you’ll be subject to income taxes on the FMV of the airdrops.
But if you receive an airdrop doing absolutely nothing, you’ll pay capital gain taxes on its FMV.
Gifting Crypto
Gifting crypto is typically seen as a disposal event, hence, capital gain taxes, unless you gift it to your spouse or civil partner. Gifting crypto to your spouse or civil partner is tax-free, plus there’s no limit on it.
Tax-Free Crypto Transactions
The following are some tax-free crypto transactions in the UK:
Buying and Holding Crypto
Buying and holding crypto doesn’t trigger a disposal event. Hence, it’s totally tax-free.
Transferring Crypto Between Wallets
Transferring crypto from one wallet to another doesn’t qualify as disposal, so it doesn’t have any tax implications.
Donating Crypto
Much like any other country, donating crypto assets to a charity registered under the central tax authority is tax deductible, meaning you can deduct the donated amount from your taxable income and pay fewer taxes.
How to Avoid Crypto Taxes in the UK
Disclaimer: we’re not encouraging you to avoid paying taxes altogether. Not only is it unethical, but it’s also illegal. You may face penalties and even criminal charges for tax evasion.
And don’t think HMRC can’t find out about your crypto transactions. Most UK crypto exchanges report to HMRC, meaning they can track your transactions and see if you’re paying your taxes accurately or not.
However, there are tax-saving strategies that are within the legal boundary in the UK you can utilize to reduce your tax liability.
Firstly, your personal tax allowances. HMRC is very generous when it comes to the personal tax allowances limit. But you can take it one step further and offset your losses to the point that your total income or gain doesn’t cross your tax allowance limit.
If you don’t have any losses to claim, harvest some. It’s called tax-loss harvesting. It’s the method of putting your poor-performing crypto assets to use. Bitcoin.Tax can help identify any crypto in your portfolio that is sitting at a loss.
Lastly, take advantage of the crypto gift tax laws in the UK. You can gift as much as you want, tax-free, to your spouse. So, you can reduce your tax liability and keep your crypto assets within the family.
If you want to go one step ahead, hire a tax professional. They can help you outline a proper game plan tailored to your situation and needs.
How to Report Crypto Taxes in the UK
The UK financial year runs from April 6 to April 5 of the following year. You must declare all your gains, losses and income on your Self-Assessment Tax Return before the deadline.
If you’re filing your tax return through the online portal, your deadline is January 31. Otherwise, if you’re filing through postal, your deadline is October 31.
You need to report all your crypto gains and losses on SA100 and Capital Gains Summary SA108, while crypto income goes on SA100 (Box 17 of your Self-Assessment Return).
Needless to say, keeping records is crucial as you’ll be required to submit supporting documents, records and data. It’s better to use a crypto tax tool like Bitcoin.Tax for this purpose to save time and headaches.