Even at the best of times, tax can be complicated. However, crypto tax can hurt your brain if it is not explained well! This article will cover everything you need to know about paying cryptocurrency tax in the UK.
Cryptocurrencies are financial instruments; therefore, you must understand the tax rules to stay within the lines of the law. Let’s start with discussing whether crypto is taxed in the UK.
Yes, crypto assets are subject to either capital gains or income tax, depending on the type of transaction.
But in 2014, HMRC stated in their tax guidance for crypto assets that “a transaction may be
so highly speculative that it is not taxable or any losses relievable”. This was interpreted as
comparing trading crypto assets to gambling for tax purposes. Leading taxpayers to conclude
that crypto gains were not taxable.
However, in December 2018, when crypto assets had become much more widely used and accepted, HMRC switched their stance and stated that they should be reported and taxed accordingly.
HMRC continues to develop their framework for crypto assets as the industry is still emerging and evolving (particularly for assets such as NFTs).
Most cryptocurrency investors are taxed through the capital gains tax. But you may be subject to income tax if you generate an income through cryptocurrency.
The amount of tax you pay depends on the type of tax you are subject to and the earnings band you are in. The two types of tax your crypto profits will be attributed to are capital gains tax and income tax
Before we dig into the different factors effecting capital gains and income tax, let’s look at some points that will help you understand crypto tax.
A taxable even is any event which may result in taxes owed to the government. Each taxable event is subject to reporting to HMRC. When it comes to crypto, earning, receiving, selling or exchanging assets are the most common taxable events.
Here are some examples:
(such as USDT).
fees on crypto trades, buying a Starbucks coffee or paying for a software subscription.
an operation is treated as a disposal (and therefore is taxable).
A non-taxable event is an event which does not need to be reported to HMRC. Some of these events can be used to your advantage to reduce or avoid paying taxes altogether. Some of the most common ones include:
Transferring a token between two wallets or accounts (for example, from your Binance account to your Metamask) is not considered a taxable event.
Purchasing crypto assets with fiat is not taxed in the UK. But be sure to keep records of your purchases, though, as you will need them to figure out your profit and losses.
One thing to keep in mind is that purchasing assets such as NFTs with other cryptocurrencies is classed as an exchange, and so is a taxable event.
HODLing crypto is not a taxable event because you have not initiated an event.
Transactions between you and your spouse are not considered taxable events. You can use this rule in your favour if your spouse has not used their tax-free allowance.
Charitable donations do not result in net profit, so HMRC does not tax them. In fact, you can even use them to offset profits.
Yes, HMRC has agreements with centralised exchanges such as Coinbase to track their users activity. In 2022, Coinbase contacted its UK customers with over £3000 in crypto and said they would share their data with HMRC.
HMRC also has crypto records dating back to 2014. Exchanges can issue the Know Your Customer (KYC) information you share with them and your account activity upon HMRCs request. This allows HMRC to connect your crypto funds to your identity.
Even if you hold crypto in self-custody wallets, HMRC could use KYC accounts connected to you to follow the money back to your self-custody wallet.
Next, let’s look at the specific forms of tax and the rates you would pay.
When profits made from crypto come from an asset value appreciating, they are subject to capital gains tax by HMRC. You are subject to pay this tax on each taxable event which falls under the capital gains criteria.
The criteria for what is subject to capital gains tax is when profit comes from something which is:
When it comes to capital gains tax rates, there are three rates for individual investors:
You can “use up” your allowance in each band before moving to the next band.
However, your capital gains tax band depends on your income level in the same year. When calculating your tax band, you must capital gains with your income earnings. If you have income earning from the year, your tax free allowance will be deducted from that. And if your income exceeds £50,271, then your entire capital gains is subject to the 20% tax.
So, now you understand tax bands, but to know how much tax you owe, you must first calculate what your annual capital gain is. The equation for this is simple: The total capital gains minus total losses in the year, minus the capital gains tax annual exemption. Although this may seem easy, things can get tricky when calculating gains and losses.
In order to calculate your capital profits or losses, you must subtract the asset’s cost from when you bought it from the price at the time you realised (triggered a taxable event) the asset.
When calculating capital gain from exchanging one crypto asset for another, take the market value of the crypto received minus the cost of the original token.
You can bring capital losses forwards from earlier tax years if you want to reduce capital gains.
Allowable expenses are costs associated with doing business which can be deducted from your overall net profit. In this section, we will run through which crypto-related costs are classed as allowable expenses by HMRC.
When using an exchange to buy, sell or trade tokens, some fees are classed as allowable expenses, but not all of them. Below is a list of the most common fees charged by
exchanges and whether or not they are allowed by UK tax legislation section 38 TCGA 1992:
Where an allowable cost relates to more than one asset, you can divide the cost (on a 50/50 split) between those assets. There are other methods to appropriate this type of cost, but this method is the most common.
Costs for mining activities (such as purchasing equipment and electricity) do not count toward
allowable expenses as they’re not “wholly and exclusively” used to acquire the tokens and so cannot satisfy section 38(1)(a) TCGA 1992 requirements.
However, deducting some of these costs against profits for Income Tax purposes might be possible.
Also, based on the chattels exemption and the wasting assets exemption, if you decide to sell your mining equipment, you may be able to deduct its incurred cost from your tax accounts.
Income that does not come from your crypto asset holdings appreciating is classed as income tax from HMRC. Some examples of income tax include day trading, mining, most staking/lending rewards, airdrops and creating and then selling NFTs or getting paid in crypto.
HMRC has not yet released specific instructions on whether play-to-earn gaming and other similar models will be classed as income tax. However, based on the appreciating asset criteria, these types of earnings will likely be classed as income and not capital gains.
We will take a deeper look into each specific crypto activity and its relation to tax later in this article.
The main difference between income and capital gains tax is their tax rates. Let’s take a look at income tax rates:
The income tax rates are as follows:
Similarly to capital gains tax, you use up all your income in the lowest band before moving up to the next. This is known as progressive income tax banding. Here’s an example to make it easy to understand:
Say you earn £60,000 in a year. The first £12,500 would be tax-free. The next £37,499 would be taxed at 20%, and the remaining £10,000 would be taxed at 40%.
Calculating income tax bands tax is relatively simple. The complexity comes if you do not convert income from crypto to fiat as soon as it is earned.
For example, if you earn regular rewards for staking crypto, and do not sell or trade them for a different currency, then you need to report them as the market value at the time they were earned and not the current valuation at the time you report them.
This can be a pain, especially if you have many small transactions. Luckily, instead of calculating each transaction one by one, Cryptiony can do this for you!
Once you calculate the market value for your assets at the time you earned them, you can simply add up all earnings for the tax year to figure out your tax band.
When it comes to crypto being lost or stolen, HMRC has a clear and unfortunate policy for crypto users.
HMRC do not consider theft to be a disposal (sale), as the individual still owns the stolen asset
and has a right to recover it. This means victims of theft cannot claim a loss for Capital Gains Tax.
Similarly, if you purchase tokens but do not receive them, you also may not be able to claim a capital loss.
On the other hand, if you buy tokens and do actually receive them, and then the tokens become worthless, you may be able to make a negligible value claim to HMRC.
Now let’s look at your ability to claim capital losses when you lose tokens.
In the same way as if your crypto assets are stolen, if they are lost, then you still technically own the assets, and they are still on the blockchain. Meaning you are unable to claim a loss.
However, if you cannot recover your assets, you can place a negligible value claim to HMRC. Claims are decided case-by-case, but you can offset your capital gains if the claim is approved.
Share pooling is a method used to group transactions of the same type when reporting to HMRC.
HMRC has specified crypto investors should use it to prevent wash trading. The term wash trading describes when an investor sells an asset at a loss only to buy the same asset (or similar) back shortly after in order to manipulate profit and losses to reduce taxes.
HMRC recommends this method be used when “any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired”. In simple terms, this means cryptocurrencies should be pooled, but NFTs should not (because each one is different from the last).
When pooling crypto assets, you should keep a record of the amount paid for each one, as this is still used to calculate the capital gain. You should also record the number of coins you own.
If you sell all the coins in a pool, the calculation would be total sale price – total cost = capital gain/loss.
However, if you only sell a portion of the pooled coins, you deduct an equivalent proportion of the pooled cost (along with any other allowable costs) to reduce your gain.
Aside from making accounting easier, pooling also prevents wash trading – where
If you buy or sell tokens within the same day, HMRC will treat this as a single transaction. Meaning the cost and sale price are calculated as an average of the tokens traded within that day.
But if the number of tokens you buy and sell is not equal, then you move on to the 30-day rule.
To make this easier to understand, lets us an example:
Martyn holds 5,000 token B in a section 104 pool (a standard transaction pool). He spent a total of £500 acquiring them, which is his pooled allowable cost.
On 23 June 2022, Martyn entered into the following transactions:
Martyn’s disposals both take place on the same day, so they are treated as a single disposal of
1,500 token B for £1,400. Martyn’s acquisition occurs on the same day, so the acquisition is matched with the disposal. Martyn will need to work out the gain on his disposal of 1,500 token B as follows:
|Consideration||£800 + £600||1400|
|Less allowable costs||£1,000 x (1,500 / 1,600)||(£938)|
Martyn is unable to match the remaining 100 token B to disposals on the same day. Instead, those 100 token B’s and their cost of £62 (£1,000 x (100 / 1,600) will go into the section 104 pool. The section 104 pool now contains 5,100 token B and total pooled costs of
|Date||Quantity of token B||Pooled allowable costs|
If you buy and sell an even number of tokens over 30 days, you should use the cost basing method to calculate your capital gains. This will give you an overall figure for the month in the same way as the same-day rule.
For anything over 30 days, you can pool your transactions using the pooling cost basis method mentioned above.
To show this in simpler terms, let’s run through another example:
Rachel holds 2,000 token C in a section 104 pool. She spent £1,000 to acquire them,
which is her pooled allowable cost.
Rachel enters into the following series of transactions:
Acquisitions within 30 days of a disposal are matched based with the earliest acquisition being matched to a disposal.
The acquisitions on 21 April 2022 and 28 April 2022 take place within 30 days of the disposal on 31 March 2022. This means that the acquisitions are matched to the disposal on 31 March 2022 as far as possible.
The acquisitions on 28 April 2022 and 1 May 2022 took place within 30 days of the disposal on 20 April 2022. This means that the acquisitions are matched to the disposal on 20 April 2022 as far as possible. Rachel will need to work out the gain on her two disposals as follows:
31 March 2022
|Less allowable costs – 30 days (21/04 – 700 token C)||(£175)|
|Less allowable costs – 30 days (28/04 – 300 token C)||£100 x (300 / 500) = £60
20 April 2022
|Less allowable costs – 30 days (28/04 – 200 token C)||£100 x (200 / 500) = £40
|Less allowable costs – 30 days (01/05 – 300 token C)||£150 x (300 / 500) = £90|
Rachel is unable to match the remaining 200 token C to acquisitions within 30 days of the
disposal on 20 April 2022. Instead, those 200 token C and their associated cost of £60 (£150
x (200 / 500)) will go into the section 104 pool. The section 104 pool now contains 2,200 token C and total pooled costs of £1,060:
|Date||Quantity of token C||Pooled allowable costs|
Margin and futures trading allows users to borrow capital to trade markets. HMRC has not yet released specific information on this type of trading, but for the average crypto user, you should report margin and futures income as capital gains.
On the other hand, if you are an active financial trader (you operate an entire business around trading assets), you should report profits as income.
New cryptocurrency projects sometimes distribute tokens for free as a promotional activity to attract attention to their cryptocurrency.
When it comes to receiving airdrops, HMRC states the coins you receive should be reported as income tax if they are issued in return for a service (such as social media promotion). However, if you receive the tokens without doing anything in return, they should be reported as capital gains.
A fork is when a cryptocurrency network splits into two. It usually occurs due to some kind of network failure, a bug or a philosophical disagreement between stakeholders. A fork generally results in tokens being distributed 1:1 with the old coin.
For example, in 2016, Ethereum was forked into a new project Ethereum Classic, following a philosophical dispute. The Ethereum Classic token was distributed 1:1 to Ethereum holders. This meant if you held 1 Ethereum, you would get 1 Ethereum Classic.
When you receive a forked coin, HMRC states you should pool the two currencies. They do not provide clear guidance on attributing each coin’s cost. But the most common way is to split the cost of the original currency 50/50.
In short, this means forks are not taxable events. Instead, you would only pay tax on a forked token if you sell it.
HMRC separates cryptocurrency miners into two groups: hobbyists and businesses.
The four factors that differentiate between a hobbyist and a business are:
Based on these factors, if you are deemed a hobbyist, you must report assets received through mining as income tax. And when you dispose of the assets, you must also pay capital gains tax.
For businesses, assets gained through mining are treated as trading profits, so they should be dealt with accordingly. If you sell the assets for profit compared to the market value at the time you earned them, the profit is also subject to trading tax.
DeFi is one of the most popular aspects of cryptocurrency for institutional and retail investors alike.
HMRC have released some guidance on DeFi earnings, but it still leaves much to be desired. However, any earnings resulting from capital appreciation fall under income tax. This means profits from buying, selling or swapping tokens are capital gains.
But here’s where it gets a little slippery.
HMRC considers profits to be income when:
This leads to the conclusion that the status of DeFi earnings depends on the specific transaction conditions.
One of the hottest crypto trends of 2021 was NFTs. Some NFTs were selling upwards of £1 million! With all this hype and adoption, we must understand the taxes involved.
Firstly, NFTs are a form of crypto asset. So any profits from buying and then selling count as a capital gain. One thing to look out for is that purchasing NFTs is often taxable.
This is because NFTs are usually bought with cryptocurrencies such as ETH or SOL. HMRC would class this as a token swap (this includes stablecoins too). Therefore, you should report the profit or loss of the coin used to pay for the NFT.
On the flip side, if you pay for an NFT directly with fiat currency, purchasing the NFT is tax-free.
Finally, if you create and sell an NFT, this falls under income tax. The income generated from NFT sale royalties is classed as income too.
You should keep separate records for each transaction; this includes:
It also helps to keep other records, such as wallet addresses, because HMRC might ask to see them if they carry out a compliance check.
There are many techniques taxpayers use to reduce their tax bill at the end of the year. But some of the most common are:
Even if you are trading as an individual, if HMRC finds your operation comparable to that of a business, then you might be subject to other business-related taxes such as Corporation Tax and VAT.
This guide is intended as a generic informative piece. This is not accounting or tax advice
that can be relied upon for any UK individual’s circumstances. Please speak to a
qualified tax advisor about your circumstances before acting upon any of the
information in this guide.