As cryptocurrencies become more popular and integrated into everyday transactions, tax authorities around the world are increasingly focusing on proper reporting and taxation of income and gains related to cryptocurrencies. They advise users to keep detailed records of their transactions, including the date, time, amount, and purpose of each of them.
In the UK, crypto assets are subject to taxation, so all transactions must be tracked and reported to the HMRC. In this guide, the experts at Grapherex have put together all the most valuable information about how to deal with the complexities of crypto taxation. We’ll help you stay organised so that you can meet your tax obligations.
How Cryptocurrency Is Taxed in the UK
Taxes for crypto are set by the HM Revenue & Customs. It is specified that crypto may be subject to both Capital Gains Tax and Income Tax, which depends on the transaction type. The UK doesn’t have a tax specifically for Bitcoin or cryptocurrencies.
The exact amount you will pay depends on the nature of your transactions, the tax rates applied, and the Income Tax bracket you belong to.
- With CGT, if your capital gains from cryptocurrency exceed the tax-free allowance of £6,000, you will be taxed at 10% or 20%. From April 2024, the allowance will halve to £3,000.
- With Income Tax, the rate depends on your Income Tax Band, as always, ranging from 0% to 45%.
How will they know if you need to pay any tax? HMRC has a data-sharing programme with all UK exchanges. It has data on cryptocurrency transactions from 2014 onwards. What’s more, HMRC has the KYC information you provided when you registered on any UK exchange or wallet (this is required by the Finance Act).
In HMRC’s Cryptoassets Manual, you can find more data on cryptocurrency taxes for individuals and businesses, Capital Gains Tax and Income Tax, and information on allowable expenses and exemptions.
When Is Cryptocurrency Not Taxed?
The good news is that you won’t always pay tax on crypto. In the UK, some transactions are tax-free. Here’s the list of them:
- Buying crypto with fiat.
- Holding crypto.
- Transferring crypto between your own wallets.
- Donating crypto to charity.
- Gifting crypto to your spouse.
You are allowed to use the last transaction type to your advantage if your partner has not used their capital gains allowance this year.
How Does Crypto Taxation Work in the UK?
Now let’s look at when crypto is taxed. If you are deemed to have earned income from cryptocurrencies as a trader, you will have to pay Income Tax. If you are deemed to have made a profit from selling or disposing of cryptocurrencies as an investor, your profit will be subject to Capital Gains Tax.
Remember that being qualified as a trader or investor is not something you can determine on your own — both types have clearly stated transaction frequencies and volumes. Check the legal requirements with HMRC first.
Crypto Capital Gains and Losses
Any time you sell, trade, spend, or gift crypto (not to your spouse) — you’ll pay Capital Gains Tax. Unlike other countries, the UK doesn’t have short-term and long-term cryptocurrency tax rates. Here are the tax percentages for the three categories of taxable income.
Capital Gains Tax is applicable when you make a profit on a transaction. For example, if you buy 1 BTC at £10,000 and sell it for £15,000, your capital gain is £5,000, and this amount is taxed. Your allowable cost is the value of the crypto asset you purchased minus any available deductions. These are transaction fees charged by an exchange plus network fees. So, if an exchange charged you £5, your capital gain would be £4995.
When you sell your crypto for a lower price than what you paid for it, it results in a capital loss. You won’t pay Capital Gains Tax on any capital losses. And you can offset capital losses against capital gains, reducing your tax liability. Keep records and report them to HMRC. It is advisable to register capital losses in the year they occur, although HMRC allows a four-year time limit for registration. Capital losses cannot be used to offset income from employment.
Additionally, HMRC has comprehensive guidance on lost and stolen crypto.
In the UK, cryptocurrency transactions that are classified as income are subject to tax at the normal Income Tax band. In addition, there may be a requirement to pay National Insurance contributions on income derived from cryptocurrencies. Crypto is classified as income if it comes from the following sources:
- Getting paid in crypto
- Staking rewards
- Mining tokens
- Most airdrops
Read more about taxes on the income you receive from lending and staking — here’s the HMRC guidance on DeFi transactions.
For crypto income, there are the same Income Tax Bands as you have for your regular income:
How to Report Crypto Taxes
When it comes to filing taxes on cryptocurrencies in the UK, you include them on your Self Assessment Tax Return. Below is a brief overview of the reporting process:
- Report your cryptocurrency capital gains and losses on Form SA100 and on the SA108 Capital Gains Summary Form.
- Report your crypto income on Box 17 of your Self Assessment Tax Return (SA100).
You have the option of completing this process online using the Government Gateway service, or you can submit your Self Assessment Tax Return by post using paper forms.
How to Track Crypto Transactions
Preparing a tax return involves taking various factors into account. It is very important to carefully monitor and report all cryptocurrency transactions and seek advice from a tax professional to meet your obligations. The complexity varies — it could be simply taking screenshots of a few crypto transactions made over the year or recording transactions across multiple Web3 ecosystems like Grapherex.
Fortunately, there are specialised software solutions for cryptocurrency taxation that help track and generate transaction reports. Popular options include Koinly, CoinLedger and Accointing.
If you prefer to proceed on your own, here’s a brief step-by-step guide for you:
- Identify and organise all cryptocurrency transactions.
- Create a record with the type of crypto, date, amount, and value at the time of each transaction.
- Calculate the cost of each transaction, taking into account the purchase price and fees.
- Determine the profit or loss for each transaction.
Keeping accurate records and being aware of the latest tax guidelines will allow you to effectively manage the tax implications of your cryptocurrency investments.