Crypto Tax Guide UK | Everything you need to know
Have you been making crypto investments? Or are you planning to make some in the near future? Doesn't matter because whatever the case, you will have to report transactions to the HMRC, and pay your taxes. But before you can do that, you need to be aware of the UK tax infrastructure and understand the nuances of crypto taxation in the UK.
However, it might seem intimidating. After all, where should one start?
You should start here with this ultimate UK crypto tax guide. We have curated the most comprehensive UK crypto tax guide covering all aspects of crypto taxation including capital gains tax UK, income tax UK, and NFT taxes, in a very digestible manner.
So let’s get started…
Crypto Gains Tax
Since crypto is considered to be a capital asset, a disposal of a crypto asset that results in capital gain is a taxable event in the eyes of HMRC and attracts a capital gains tax. Any of the following activities will be considered as a disposal of a crypto asset:
- Selling a crypto asset
- Buying goods or services with a crypto asset
- swapping one token for another
- Gifting crypto to someone other than your spouse or civil partner
Note that HMRC doesn't have a long-term or short-term capital gains tax rate. The segregation is made based on income level.
The HMRC offers a capital gains tax allowance of £12,570 to every citizen, which means you need to make a gain over the allowance limit to be liable for any tax obligations. If you have disposed of a crypto asset and incurred a profit of less than £12,570, you can write off your entire gain against the allowance limit.
It’s important to note that the allowance limit is for the tax year 2021-2022 and it will be reduced by 50% starting April 2023.
Also, any losses incurred via the disposal of a crypto asset can be written off against the gain to reduce your taxable income. For example, if you’ve made a gain of £42,570, now you can deduct your allowance amount from the gain, so the taxable income comes down to be £30,000. Now you can close some of your dud positions at a loss to reduce your taxable income even further. Let’s say you close dud positions worth £20,000, now your taxable income will come down to £10,000.
Crypto Capital Gains Tax Rates UK
The capital gains tax rates are pretty straightforward in the UK, the tax slabs are segregated based on income levels. Below are the tax slabs according to which your capital gains will be taxed.
If your total income is less than £50,270, you will be taxed at 10%.
If your total income is more than £50,270, you will be taxed at 20%.
Crypto Losses
Investing in cryptocurrency, like any other investment, may result in loss. If you sell a capital asset and incur a capital loss, you are not required to pay capital taxes on your loss.
It's crucial to keep track of all losses and report them to the HM Revenue and Customs (HMRC), as losses can be used to lower your taxable capital gains. There's no limit to the amount of losses you can use to offset gains, potentially bringing your taxable gains down to the annual tax-free allowance of £12,300 and avoiding paying taxes on your gains.
It’s important to note that you carry your losses forward into the future indefinitely until you have used up all of them, so make sure you track all your losses and report them judiciously to the HMRC to make the most of them.
How to calculate Crypto Gains and Losses
Calculating your crypto gain or loss is a pretty straightforward process. The first step is to calculate your cost basis for any particular asset(the cost of acquisition of the asset). You can calculate your cost basis by simply adding the price of the asset to any transaction fees or gas fees paid while acquiring the asset.
Your capital gain or loss is the difference between your cost basis and the amount you receive on disposal. If the difference comes out to be positive(if the disposal amount is higher than the cost basis), it’s considered a capital gain and attracts a capital gains tax. In case it’s negative, it’s considered a loss and therefore attracts no tax liabilities.
However, you should track all your losses because you can offset your losses against your gains and reduce your tax bill.
Crypto Tax Breaks UK
There are three primary tax breaks offered to citizens in the UK:
- Personal Income tax Allowance: For the 2021-22 tax year, the first £12,570 is tax-free. This is relevant to your crypto taxes because you can reduce this allowance amount from your total income while calculating your tax band. It’s important to note that you don’t get a personal income tax allowance if your income is more than £125,140 in a year.
- Trading and Property Allowance: The Trading and Property Allowance allows for £1,000 of income from either trading or property to be tax-free. If you receive income from both, you can enjoy up to £2,000 of tax exemption.
- Capital Gains tax-free Allowance: As already mentioned above, in the UK there is a Capital Gains Tax-Free Allowance of £12,300. After April 2023, this allowance will be reduced to £6,000, and in April 2024 it will further decrease to £3,000.
Crypto Cost Basis Method UK
Calculating the basis for a single token or currency is a simple task, however, people mostly trade and invest in multiple assets throughout a tax year, which makes cost-basis calculations a bit complicated.
In the UK, there are three possible cost basis methods you can use and you need to work through them in order of which applies to your assets:
- Same-Day Rule: When buying and selling coins, if you complete the transaction on the same day, you must use the cost basis of that day to determine your gains or losses. If you sell a higher amount than you purchased, proceed to the next guideline.
- Bread and Breakfast Rule: If you sell and then buy back the same coins/tokens within 30 days, you will use the cost basis of the newly purchased coins/tokens to calculate any gains or losses. If you sell a greater amount than what you bought in this time frame, you'll follow the final rule.
- Section 104 Method: If neither of the previous two rules applies to your crypto transactions, you must use the cost basis method when determining your cryptocurrency taxes. This method operates similarly to the ACB (Average Cost Basis) by calculating an average cost basis for a group of assets by dividing the total amount paid for all assets by the total number of coins/tokens held
.
Crypto Income Tax UK
Cryptocurrency transactions classified as income may be subject to Income Tax and National Insurance contributions, taxed at your regular tax rate. There are various instances where crypto transactions can be viewed as income by the HMRC and taxed according to income tax laws.
Your gains will be considered an income if they arise from the following sources:
- Received as compensation for a product or a service
- Received as a staking reward from a DeFi protocol
- Received as a recurring income in the form of interest/reward from the borrower
- Received as a mining reward
- Received via airdrops
These transactions are taxed according to the regular income tax slabs. HMRC has finally issued clear guidelines for the taxation of DeFi transactions. Since staking and lending involve recurring payments in the form of interest or reward from the DeFi protocol, they can be considered as income and therefore attract income tax. Although DeFi transactions may also be taxed under capital gains tax laws depending on the nature of transactions.
The following cases shall be considered for an income to be considered taxable in the case of DeFi transactions.
- If the return is pre-determined
- If the return originates from a borrower or a DeFi platform
- If the return is periodic as against a one-time payment
The HMRC is yet to release any guidance on income from play-2-earn, learn-2-earn, and watch-2-earn Web3 platforms that offer a reward for engaging with their platform. Some examples would be:
- Tokens earned through Brave Browser for watching ads
- Tokens earned on Coinmarketcap learning or Coinbase learning center
- Rewards earned on Odysee by watching videos
Crypto Income Tax Rates UK
To determine the tax owed on crypto income, familiarize yourself with the crypto Income Tax rates, which align with the Income Tax Bands for other forms of income.
Notice that taxes in the UK are progressive, which means that not all your income is taxed at a flat rate, but only the excess amount.
Let’s understand this through an example:
Suppose you make £20,000, the first £12,570 will be taxed at 0% as it falls under the first slab and the remaining £7,430 will be taxed at a tax rate of 20% as it falls under the second slab.
How to calculate crypto income
The single most important thing you need to accurately calculate your crypto income is a list of cost basis for every token in your crypto portfolio, and a list of all the disposals you’ve made during the tax year along with the price of disposal.
Determining your cryptocurrency gains is simple if you have infrequent small profits, but tracking and calculating gains from recurring sources such as staking rewards or airdrop income from multiple assets can become complicated. Fortunately, Kryptos can quickly manage all these transactions for you and calculate your total cryptocurrency income in minutes.
Tax-free crypto transactions
In the UK, some tax-free crypto transactions include:
- Personal gifts to individuals with a value of less than £250.
- Transactions that are made in a personal capacity and not as part of a trade or business.
- Transfers of crypto assets between an individual's wallets or exchanges.
- Donations of crypto assets to charities registered with the Charity Commission for England and Wales.
- Crypto assets received as airdrops, provided they are not part of a trade or business.
Taxed crypto transactions
Crypto transactions that are taxable in the UK include:
- Disposal of crypto assets for a profit, where the profit is considered as taxable capital gains.
- Crypto assets that are received as income, such as mining rewards or staking rewards, where the income is considered taxable income.
- Trading of crypto assets as part of a trade or business, where the profits are considered taxable business income.
- Sale of goods or services for crypto assets, where the profits are considered taxable business income.
How, when, and what to report on your UK crypto taxes
When:
CGT(Capital gains Tax) is due when crypto assets are disposed of, for example by selling or trading. Income Tax is due when you appear to be making an income with crypto assets.
What to report:
When filing taxes, you must report all disposals of crypto assets, including any gains or losses, and must keep records of the cost and sale proceeds.
How:
To report crypto taxes in the UK, you must file a self-assessment tax return. This should include all relevant information about their crypto activities, including the date of purchase, cost, date of sale, and sale proceeds. It is recommended to keep records of all transactions, including exchange statements and wallets.
When to report crypto transactions in the UK
In the UK, individuals are required to report their cryptocurrency gains and report them as part of their taxable income. This should be done annually as part of the individual's Self-Assessment tax return. The deadline for filing a Self-Assessment tax return for the 2021-2022 tax year is 31st January 2023.
How to file crypto taxes in the UK
You file your crypto taxes when submitting your self-assessment tax return to the HMRC. You can report your crypto gains and losses on form SA-100 and crypto gains summary SA-108.
You can report your crypto income in box 17 of your self-assessment tax return(Form SA-100).
Can the HMRC track crypto?
Yes, HMRC can track the crypto transactions of UK residents through various means, including information-sharing agreements with exchanges and other third-party service providers, as well as by using blockchain analysis tools. They can also request information from individuals and businesses as part of tax investigations.
What crypto records will the HMRC want?
The HMRC expects every taxpayer in the UK to actively maintain the following records:
- The class of crypto asset
- Time and date of transactions
- Record of acquisition and disposal of crypto assets
- The volume of assets held or traded
- The value of assets in GBP
- The total value of assets held
- Bank statements and wallet addresses
How to avoid crypto taxes in the UK
Tax evasion is a punishable offence in the UK and we advise you to diligently report all your crypto transactions to the HMRC and pay your taxes on time to avoid getting into legal trouble.
However, there are ways you can legally and strategically reduce your crypto taxes. So let’s look at some of these ways:
- Use a crypto tax calculator to make sure all your losses are accounted for
- Take advantage of tax-free thresholds(capital gains tax-free allowance, tax-free allowance)
- Invest some of your crypto assets into a pension fund.
- Donate your crypto
- Gify crypto to your spouse or civil partner
- Invest in an opportunity-zone fund.
- Use tax-loss harvesting
Tax on mining crypto UK
Depending upon the size, activity, and objective of the miner, crypto mining is taxed in two different ways. If an individual or group of individuals perform mining operations in their free time just to make a couple of extra bucks on the side, then the event is perceived as habitual mining by the HMRC, and the tokens received are subjected to income tax. These tokens are also subjected to capital gains tax upon disposal.
For mining companies, the taxation model is different. All tokens obtained through mining are included in the company's trading profits and are subjected to an income tax.
Tax on staking crypto
According to the HMRC guidelines on Staking rewards, staking rewards can either be viewed as taxable trade subject to capital gains tax, or they may be viewed as miscellaneous income attracting regular income tax based on the consensus you are staking on and how the rewards are distributed.
Whether staking rewards are viewed as taxable trade depends on the following variables:
- Degree of activity
- Organisation
- Risk
- Commerciality
If it’s not viewed as a trade, the value of the tokens at the point of receipt in pound sterling will be taxed as income. Note that if you choose to hold these tokens and dispose of them later, you will have to pay capital gains tax on any gains you make.
Crypto margin trading, futures and CFDs
In the UK, profits from trading cryptocurrencies, including margin trading, futures, and CFDs, are subject to capital gains tax. If the profits are above the annual tax-free allowance (currently £12,300), the excess must be reported and taxed at the individual's marginal tax rate. Additionally, value-added tax (VAT) may also apply to cryptocurrency transactions in the UK.
NFT Taxes UK
NFT taxes are still a grey area in the UK crypto tax infrastructure because the HMRC doesn’t consider NFT to be the same asset class as cryptocurrencies and therefore segregates them from the guidelines governing their taxation.
Although no new legislation has been passed to accommodate the taxation of NFTs in the UK, here’s how some of the common NFT transactions are taxed in the UK:
- Buying an NFT with crypto assets- attracts capital gains tax
- Buying an NFT with fiat currency- attracts zero tax
- Disposing of an NFT for fiat or crypto- attracts capital gains tax
- Swapping one NFT for another- attracts capital gains tax
- Minting an NFT from a blockchain- attracts zero tax
- Gifting NFTs- attracts capital gains tax unless(unless it’s your spouse or civil partner)
DeFi crypto taxes UK
The HMRC recently announced that DeFi transactions will be taxed depending on the nature of the transactions. If the DeFi transaction results in a capital gain, it is subject to capital gains tax. And if a person or institution appears to be generating income from DeFi protocols, they must pay income tax on that income.
DeFi transactions such as adding/removing liquidity, staking assets, and lump sum rewards received from staking and lending in most instances are considered disposal of assets and attract capital gains tax.
Returns from DeFi protocols may be considered an income when:
- The return is pre-determined
- The return originates from a borrower or a DeFi protocol
- If the return is recurring in nature
Lost or stolen crypto
While capital losses can be written off against capital gains, lost or stolen crypto cannot be written off against any of your gains. You can make a negligible value claim in special circumstances and later convert that claim into a capital loss.
Crypto that is lost is not considered a loss as the assets remain under your ownership, despite losing access through a missing private key. Meanwhile, stolen crypto is not viewed by the HMRC as a disposal of assets and thus cannot be offset against capital gains.
How are airdrops and forks taxed in the UK?
Forks
There are two ways a blockchain can split. One is through a soft fork and another is through a hard fork. According to the HMRC guidelines, a soft fork is a non-taxable event, because it ends with no new tokens.
A hard fork, on the other hand, results in the distribution of a fixed number of new tokens to each user in exchange for their existing tokens on the blockchain. Although these new tokens aren't considered income and don't attract income tax, they are assigned a cost basis, or acquisition cost, based on the value of the original tokens. If the user later sells these new tokens, they may incur a capital gains tax liability.
Airdrops
According to HMRC, airdrops attract income tax(in most cases). If the tokens you receive via the airdrop are the result of an action taken by you, then the tokens received will be counted as income and will attract income tax. Note that your actions may be as simple as promoting the airdrop in your immediate network through social media, or having interacted with the blockchain in the past.
How to prepare for the approaching tax season?
Here are some steps you should take pro-actively to make sure your tax filings go smoothly this tax season:
- Keep track of all your transactions and your cumulative cost basis
An accurate tax report requires a comprehensive record of all your crypto transactions in a given tax year, along with the cost basis for each asset in your portfolio. This can be an intimidating task, as many individuals hold assets on multiple exchanges and wallets, making it difficult to track all transactions and calculate the cost basis.
We suggest using smart crypto tax software like Kryptos to manage your investments and calculate the cost basis for each asset in your portfolio. Kryptos simplifies the process by automatically fetching all your transactions from multiple trading profiles, generating legally compliant tax reports with ease, just by adding your exchanges and digital wallets to the platform
- Contact a UK-based Tax Accountant
We agree that you can file your taxes on your own, especially with powerful tax software like Kryptos on your side. However, contacting a tax accountant is always a good step because of two reasons:
- They can save you some extra pounds by taking you through some lesser-known tax loopholes
- They can audit your tax report to reveal any discrepancies which might lead to legal complications in the future.
FAQs
1. Do you pay tax when spending crypto in the UK?
Spending your cryptocurrency incurs Capital Gains Tax as you are getting rid of a valuable asset. You must determine your capital gain or loss by comparing the fair market value of your crypto on the day of spending to its cost basis. If the value of your asset has risen since you obtained it, you owe Capital Gains Tax on the resulting profit. On the other hand, if the value has fallen, you have a capital loss that can balance out any gains.
2. What is the deadline for reporting crypto taxes to HMRC?
The deadline for reporting crypto taxes to HMRC in the UK is 31st January following the end of the tax year.
3. Is crypto taxable in the UK?
Yes, crypto transactions are taxable in the UK according to the HMRC guidelines. Depending on the nature of the transactions you’re involved in, your gains may be subjected to capital gains or income tax.
4. How is Crypto Taxed in the UK?
There are no dedicated tax laws for crypto transactions in the UK. Instead, the HMRC has issued guidelines to accommodate crypto taxation within the existing tax laws. Crypto transactions are taxed based on the nature of specific transactions. If a person appears to be earning an income in the form of crypto, he/she is taxed according to income tax laws. If a person seems to be making a capital gain with the disposal of a crypto asset, he/she is taxed according to capital gains tax laws.
It’s important to note that the HMRC doesn’t consider crypto as a currency or a security, but as a capital asset, which automatically aligns its taxation with the capital asset taxation laws. However, crypto transactions can be complicated, especially those involving DeFi, that’s one of the reasons why crypto taxation is multi-layered.
5. Is Crypto legal in the UK?
Yes, cryptocurrency is legal in the United Kingdom. People are allowed to buy, sell, and hold cryptocurrencies like Bitcoin, Ethereum, and others. The UK government has stated that it intends to regulate cryptocurrencies to prevent their use in illegal activities, such as money laundering and financing of terrorism. The Financial Conduct Authority (FCA) has issued guidance on the regulation of crypto assets, including initial coin offerings (ICOs) and exchanges.
All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!
