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Have you been investing in crypto? Or are you planning to invest soon? Regardless of your category, 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?
Don’t worry we have the answer. You should start here with this ultimate UK crypto tax guide. We have curated the most comprehensive crypto tax guide for UK residents, 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…
26/06/23- Updated to accommodate ICO, Gifts and Donations taxes
26/06/23- Updated to accommodate DAO taxes
In the United Kingdom, there is no specific tax dedicated to cryptocurrencies. Instead, the tax treatment depends on the nature of the transactions involved. If the activity is classified as generating income, it is subject to Income Tax. If it is deemed to generate a gain, it falls under Capital Gains Tax.
For income-generating activities, such as receiving a salary in crypto or earning mining and staking rewards from DeFi or native blockchains, income tax is applicable. Income tax rates in the UK range from 0% to 45%, depending on the individual's tax bracket.
For gains made from crypto transactions, if the total capital gains in a tax year are below £50,270, a Capital Gains Tax of 10% is applied. However, if the gains exceed this threshold, a 20% Capital Gains Tax is levied on the entire gain.
Consider the following transactions,
2022/01/13 - Oliver buys 2 BTC
2022/01/27- Oliver sells 1 BTC (Assuming a gain of €8,000)
2022/03/23- Oliver buys 7 ETH
2022/05/12- Oliver sells 6 ETH (Assuming a gain of €15,000)
2022/06/15- Oliver receives 6.25 BTC as mining rewards (Assuming 1 BTC to be €25,000)
2022/08/17- Oliver receives 12 ETH as compensation(Assuming 1 ETH to be €2,500)
As evident from the above ledger of transactions, Oliver made two disposals.
1 BTC sold
Gain incurred from the disposal = €8,000
6 ETH sold
Gain incurred from the disposal = €15,000
Collective gain from both disposals = €15,000 + €8,000 = €23,000
This is Oliver’s taxable base, and CGT will be levied on it.
Moreover, Oliver received 6.25 BTC as mining rewards and 12 ETH as compensation. These transactions constitute an income. So let’s calculate the total income made by Oliver.
Value of mining rewards = €25,000*6.25 = €1,56,250
Value of ETH tokens received as compensation = €2,500*12 = €30,000
Total income = €1,56,250 + €30,000 = €1,86,250
This is Oliver’s taxable income base.
Since crypto is considered to be a capital asset, selling, swapping, spending, or gifting crypto results in capital gain and attracts a capital gains tax.
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 provides a capital gains tax allowance of £12,570 to each individual, meaning that you are only liable for tax obligations if your gain exceeds this allowance limit. If you have disposed of a crypto asset and made a profit of less than £12,570, you can offset the entire gain against the allowance limit.
Please note that the allowance limit mentioned is applicable for the tax year 2021-2022 and will be reduced by 50% starting from April 2023.
Furthermore, any losses incurred from the disposal of a crypto asset can be offset against the gain, reducing your taxable income. For example, if your gain is £42,570, after deducting the allowance amount, your taxable income will be reduced to £30,000. To further decrease your taxable income, you can close underperforming positions at a loss. Let's assume you close positions worth £20,000, resulting in a taxable income of £10,000.
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 gain is less than £50,270, you will be taxed at 10%. Otherwise, a 20% tax is levied on your income.
Calculating your crypto gain or loss is a simple process. Start by determining the cost basis of the asset, which includes the acquisition cost of the asset plus any transaction or gas fees paid during the acquisition.
The capital gain or loss is then calculated as the difference between the cost basis and the amount received upon disposal. If the difference is positive (disposal amount exceeds the cost basis), it is considered a capital gain and is subject to capital gains tax. Conversely, if the difference is negative, you owe zero taxes.
However, you should track all your losses because you can offset your losses against your gains and reduce your tax bill.
Consider the following transactions:
2022/01/13 - Jaimie bought 1 BTC for £21,000
2022/03/15 - Jaimie bought 4 ETH for £2,000 each
2022/04/19 - Jaimie bought 2 BTC for £23,000 each
2022/05/20 - Jaimie sold 1 BTC for £25,000
2022/07/21 - Jaimie sold 1 ETH for £2,800
As evident from the above ledger of transactions, Jaimie made 2 disposals
1 BTC sold for £25,000
Now since BTC tokens were acquired on two separate instances at different prices, we need to use a specialised accounting method for cost basis calculations. There are three tax accounting methods as specified by the tax authorities in the UK, the Same Day rule, the Bread and Breakfast rule, and the Section 104 method. You have to apply one of these methods for cost-basis calculations depending on the nature of your transactions.
Jaimie's transactions fall under the application of the Section 104 method since the disposals were not made within the same day or within a 30-day period. The Section 104 method is akin to the Average Cost Basis (ACB) method, where the average acquisition cost of the asset is used as the cost basis.
Cost Basis for BTC = £23,000 + £23,000 + £21,000/3 = £22,333 (approx.)
Disposal Amount = £25,000
Capital gain = Disposal Amount - Cost Basis = £25,000 - £22,333 = £2,667
1 ETH sold for £2,800
Jaimie acquired ETH tokens once. Therefore, this is a fairly straightforward calculation.
Cost Basis = £2,000
Disposal Amount = £2,800
Capital Gain = £2,800 - £2,000 = £800
Collective Gain from both disposals = £2,667 + £800 = £3,467
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.
Maintaining accurate records of your losses and reporting them to the HMRC is essential, as losses can be utilised to reduce your taxable capital gains. There is no limit to the amount of losses you can use to offset gains, which has the potential to bring your taxable gains down to the annual tax-free allowance of £12,300, thus exempting you from paying taxes on your gains.
Importantly, you can carry forward your losses indefinitely until they have been fully utilised. Therefore, it is crucial to diligently track and report all your losses to the HMRC in order to maximise their benefits.
Although capital losses can be offset against gains, it's important to note that lost or stolen crypto cannot be directly written off against your gains. In certain circumstances, you may be able to make a negligible value claim for the lost crypto, which can later be converted into a capital loss.
Lost crypto is not recognized as a capital loss because the assets still technically remain under your ownership, even if you have lost access due to a missing private key. On the other hand, stolen crypto is not considered a disposal of assets by the HMRC, and therefore cannot be offset against capital gains.
There are three primary tax breaks offered to citizens in the UK:
1. Income tax Allowance: For the 2021-22 tax year, the first £12,570 is tax-free. Note that you don’t get a personal income tax allowance if your income is more than £125,140 in a year.
2. Capital Gains Allowance: Every UK resident enjoys 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.
3. 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.
Calculating the cost 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:
Consider the following transactions:
2022/01/23 - Emily bought 1 BTC for £21,000 and sold it 6 hours later for £21,500
Now since the disposal was made within 24 hours, the Same-Day rule applies.
So the cost basis from the same day will be used for cost basis calculations:
Capital Gain = £21,500 - £21,000 = £500
2022/02/23 - Emily bought 2 ETH for £2,000 each
2022/03/15 - Emily sold 2 ETH for £2,500 each
2022/03/21 - Emily bought 2 ETH for £2,400
Since the tokens were repurchased within 30 days of the disposal, the Bread and breakfast rule applies which states that the cost basis is equal to the acquisition price of the newly purchased tokens.
Cost Basis = £2,400
Disposal Amount = £2,500
Capital Gain(for 1 ETH) = £2,500 - £2,400 = £100
Gain from 2 ETH disposals = 2*£100 = £200
The Section 104 Rule has been discussed in detail in the section titled “How to Calculate Crypto Gains and Losses”.
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:
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 case of DeFi transactions.
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:
To determine the tax owed on crypto income, familiarise 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.
To accurately calculate your crypto income, the most crucial requirement is to have a comprehensive list of cost basis for each token in your crypto portfolio, as well as a record of all the disposals you have made during the tax year, including the corresponding disposal prices. These details will form the foundation for accurately determining your taxable income from crypto transactions.
Determining your cryptocurrency gains is simple if you have infrequent small profits, but tracking and calculating them 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.
In the UK, some tax-free crypto transactions include:
Crypto transactions that are taxable in the UK include:
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.
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:
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.
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.
Gifting crypto to anyone other than your spouse or family in the UK constitutes a taxable event and attracts capital gain tax. However, crypto donations to a registered charity are tax-free.
When gifting cryptocurrency to someone other than your spouse or civil partner, it is necessary to determine the market value (in pound sterling) of the crypto at the time of the gift. This value will be treated as sales proceeds for Capital Gains Tax purposes.
It is crucial to note that if income tax has already been levied on the value of the gifted tokens, section 37 of the Taxation of the Capital Gains Tax Act 1992 will come into effect. Essentially, this means that the "sales proceeds" will be adjusted by the amount already subject to income tax and subsequently subjected to CGT.
When it comes to gifting crypto to your spouse or civil partner, it’s completely tax-free and there’s no limit on how many assets you can give them in a tax year.
Donating cryptocurrency to a registered charity in the UK is exempt from tax.
When an individual donates crypto to a charity, they qualify for Income tax relief on the donated amount. Additionally, they can enjoy an exemption from Capital Gains Tax, with two exceptions:
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:
ICOs are special events that allow investors to acquire tokens from an unreleased project in exchange for mainstream tokens like BTC and ETH. The HMRC is yet to release guidelines on how tokens received from ICOs are viewed from a tax perspective. However, since most European countries treat ICOs as simple crypto-to-crypto trades, we can assume that income from ICOs will be viewed as simple crypto-to-crypto trade and will be subject to CGT.
However, we do suggest seeking the advice of an expert tax accountant to make sure you don’t end up in legal trouble due to discrepancies in your tax report.
DAOs are member-owned communities with a shared vision. All the decisions in a DAO are made by the members in the absence of central leadership. DAOs are new-age institutions that aim to democratise decision-making and allow people to have a say in decisions that directly affect them. DAOs are often called the soul of Web3 and enable members to earn rewards in multiple ways. DAO contributors are rewarded for their contributions to the organization, similar to how centralized organisations pay salaries to their employees. They also pay out bounties for one-time projects and redistribute any profits generated through operations.
The HMRC is yet to release specific guidance on how income from DAOs is taxed. We are constantly on the lookout for new guidelines on the subject and all relevant details will be added here as soon they hit our radar.
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:
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.
Hard Forks, 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.
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.
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.
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).
As a crypto investor in the UK, it's essential to maintain accurate records to ensure compliance with the HM Revenue and Customs (HMRC) regulations. Here are some records you should consider maintaining:
Now that you’re aware of how your crypto transactions are taxed and what forms you need to fill out to complete your tax report, here’s a step-wise breakdown of how Kryptos can make this task easier for you:
If you still need clarification regarding the integrations or generating your tax reports, you refer to our video guide here.
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:
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!