When it comes to cryptocurrency, understanding the tax implications of your digital assets is becoming increasingly important. From buying and selling to mining and staking, each crypto-related activity comes with unique tax considerations, and complying with HMRC guidelines becomes increasingly important.
In this guide, we'll explore HMRC's stance on crypto tax so you understand what tax you might have to pay and when on your crypto investments.
Table of Contents
- Do you have to pay taxes on crypto?
- What activities associated with cryptocurrency are taxable?
- Can you offset capital losses from cryptocurrency against future gains?
- What are tax rates for crypto gains?
- How do I know if I need to pay Capital Gains Tax on my crypto investments?
- Can I avoid paying tax on crypto?
- Can HMRC track crypto?
- How do I pay crypto taxes?
- What happens if you don’t pay the right taxes on crypto gains?
- When is buying and selling cryptoassets considered trading by HMRC?
- How are tokens taxed for Capital Gains Tax?
- How do you calculate Capital Gains Tax liability when disposing of tokens?
- Do transfers of tokens between different distributed ledgers result in disposals for CGT purposes?
- What costs are deductible when calculating gains or losses from token disposals for CGT?
- What is pooling?
- How can Lawhive help?
Do you have to pay taxes on crypto?
In most cases, you do have to pay taxes on cryptoassets. Cryptoassets are not considered money by financial institutions, so they’re taxed like shares. However, there are exceptions to tax rules, especially for those not residing or domiciled in the UK.
Investors and traders of crypto assets should be aware of the various rules around different transactions, from buying and selling to activities like staking and airdrops.
What activities associated with cryptocurrency are taxable?
Activities like buying and selling crypto, being paid in crypto, inheriting crypto, mining, validating, and staking can all have tax implications.
How does buying and selling crypto affect taxes?
Profits from selling crypto are typically subject to Capital Gains Tax (CGT), while losses can offset CGT liabilities. Swapping cryptocurrencies can also trigger a taxable event for CGT purposes.
What tax obligations come with being paid in crypto?
If you are paid in crypto, regardless of the cryptocurrency received or who pays, income tax and national insurance contributions apply.
How does HMRC treat inherited cryptocurrency?
HMRC considers inherited crypto as property under UK tax law.
What are the tax implications of mining and validating crypto?
Mining can be treated as either a hobby or a business, affecting income tax and CGT obligations accordingly.
Is staking cryptocurrency taxable?
Staking rewards are taxable as miscellaneous income and are potentially subject to income tax or CGT upon disposal.
Do you have to pay tax on airdropped crypto?
Crypto is sometimes airdropped (given away) by companies as a marketing tactic to raise awareness of a new cryptocurrency. These giveaways are often done in exchange for completing small tasks like sharing a post on social media or signing up for an email newsletter.
If you receive cryptoassets without any exchange or involvement in a trade or business, airdropped crypto is generally not subject to income tax. However, if it is received in exchange for a service, it’s taxable as miscellaneous income or trading profits.
For businesses, any increase in the value of airdropped crypto is added to trading profits and is subject to income tax and National Insurance contributions.
Individuals receiving airdrops are subject to CGT at the time of disposal. For example, if they go on to sell them.
Can you offset capital losses from cryptocurrency against future gains?
You can offset capital losses from cryptocurrency investments against future gains by reporting these losses on your self-assessment tax returns. You should do this even if your gains are below the taxable threshold or you don’t typically file a return.
It’s advisable to register losses in the year they occur, but HMRC allows you up to four years to do so. After four years, you can no longer register your losses and use them to offset future gains.
What are tax rates for crypto gains?
Income tax rates range from 0% to 45%, depending on your total income.
Capital gains are subject to 10% or 20%, depending on your tax band, after the annual tax-free allowance of £6,000.
How do I know if I need to pay Capital Gains Tax on my crypto investments?
To work out if you owe CGT, you need to work out your gain for each transaction you undertake. The calculation for this is different if you sell tokens within 30 days of buying them.
Normally, your gain is the difference between what you paid for an asset and what you sold it for. If you get the asset for free, like in an airdrop, you can use its market value to work out your gain.
Tokens on which you've already paid Income Tax are exempt from CGT on their value. However, you're still liable for CGT on any subsequent gains.
If your total taxable gain surpasses the annual tax-free allowance, you must report and pay Capital Gains Tax.
Can I avoid paying tax on crypto?
Sometimes, you might not have to pay tax on certain crypto activities like holding crypto for the long term, transferring between personal wallets, purchasing crypto with fiat currency, and gifting to a spouse or civil partner are not subject to CGT or income tax in the UK.
Can HMRC track crypto?
HMRC can track cryptocurrency transactions to make sure investors comply with tax regulations. They do this by:
Collaborating with cryptocurrency exchanges to get transaction data
Looking at historical transaction data going back to 2014
Accessing KYC (Know Your Customer) information provided by individuals who sign up to UK crypto exchanges.
As part of the Crypto-Asset Reporting Framework, the UK also plans to exchange information with European counterparts on crypto transactions.
How do I pay crypto taxes?
You can report crypto gains on your annual tax return or by using HMRC’s real-time CGT reporting service.
If you invest in crypto, it’s generally seen as a form of self-employment for tax purposes, so you have to tell HMRC:
The type of token
The date of disposal
How many tokens were disposed of
How many tokens you still have
The value of the tokens in GBP
Records of pooled costs before and after disposal.
What happens if you don’t pay the right taxes on crypto gains?
If you took reasonable care in reporting your crypto taxes but underpaid, you should disclose and pay any outstanding taxes for the last four years.
If ‘insufficient care’ was taken in disclosing crypto gains, taxes must be settled for the last six years.
If you deliberately mislead HMRC about crypto gains or income from crypto, you must declare and pay taxes due for a maximum of 20 years and may face further penalties.
When is buying and selling cryptoassets considered trading by HMRC?
If someone’s cryptoasset activity is seen as trading, they’ll have to pay Income Tax on any profits, rather than Capital Gains Tax.
Whether crypto asset activity counts as trading depends on how often trades happen and how organised they are.
If someone is trading cryptoassets like they would trade shares or other financial assets, it might be seen as a trade. The rules for figuring this out are similar to the ones for shares and securities trading.
But if the activity isn’t seen as trading, it’s considered more like an investment, and then Capital Gains Tax would apply instead.
How are tokens taxed for Capital Gains Tax?
Tokens, being digital assets, are considered ‘chargeable assets’ for Capital Gains Tax if they’re capable of being owned and have a value that can be realised.
HMRC usually sees the buying and selling of tokens by individuals as investment activity rather than trading. In such cases, individuals will typically have to pay CGT on any profits made from investing in tokens.
How do you calculate Capital Gains Tax liability when disposing of tokens?
You must calculate your gain or loss when you dispose of your tokens to determine if you have to pay Capital Gains Tax. Disposal covers various actions like:
Selling tokens for money.
Swapping tokens for a different type of token.
Using tokens to buy goods or services.
Giving tokens to someone else, except your spouse or civil partner.
There’s no disposal if you keep ownership of the tokens through the transaction. For example, moving tokens between your public addresses or using services like mixers or tumblers where you get back the same type of token you put in. But if you swap token A for token B, it counts as disposal.
If you give tokens to someone who isn’t your spouse of civil partner, you need to figure out the value in points. Even if they don’t receive anything, for tax purposes, they’re treated as if they got that amount in pounds.
If Income Tax has already been charged on the tokens’ value, specific rules apply. If individuals donate tokens to charity, they don’t have to pay CGT on them, except in certain circumstances.
Do transfers of tokens between different distributed ledgers result in disposals for CGT purposes?
You can’t just switch tokens from one distributed ledger to another. Say for example you want to change your Bitcoin to Ethereum, you need to move the tokens to a public address not controlled by you and an equal amount of tokens of the second cryptoasset are sent back to an address you control. This is done using a smart contract.
Some of these types of transfers only go one way, meaning once it’s done you can’t undo it or move the tokens back later. HMRC sees this as a type of transaction where the costs of the first crypto assets are fully attributed to the second one. If you later sell or dispose of the second crypto asset, you’ll have to pay CGT on any gains or losses as usual.
What costs are deductible when calculating gains or losses from token disposals for CGT?
Not all costs can be deducted when figuring out gains or losses from selling tokens.
Allowable deductions include
The initial purchase price.
Transaction fees.
Advertising costs.
Professional contract drafting fees.
Valuation costs.
Some fees charged by exchanges, like deposit fees or withdrawal fees for fiat currency, are not deductible. For example, if you exchange pounds sterling for another fiat currency, the fee is considered an allowable cost. But if you withdraw sterling from an exchange, it’s not deductible because sterling isn’t an asset for Capital Gains Tax. When swapping one token for another, the fee is split between both assets and deductible accordingly.
Mining costs, including equipment and electricity, are generally not deductible for token disposals. However, they may be deductible against profits for Income Tax purposes. If mining constitutes a trade, the tokens initially form part of trading stock. When these tokens are sold, businesses should use the value from their trading accounts as the allowable cost.
What is pooling?
Pooling in crypto taxation involves grouping identical assets and calculating their average cost basis. This simplifies tax calculations by treating multiple acquisitions and disposals of the same type of crypto as a single transaction.
Non-fungible tokens (NFTs) are not pooled because they are separately identifiable and each type of token requires its own pool. For instance, owning Bitcoin, Ether, and Litecoin would mean three separate pools, each with its own pooled allowable cost.
The 'same day rule' ensures that acquisitions and disposals on the same day are treated as single transactions, minimising CGT calculations. The '30-day rule' applies when acquiring tokens of the same type within 30 days of selling. It matches acquisitions to disposals, with any excess tokens going into the section 104 pool.
How can Lawhive help?
At Lawhive, our expert network of money, tax, and debt solicitors can help you if you are facing a tax investigation by HMRC or are in a dispute with them about how much tax you owe.
Tax laws and regulations around cryptocurrency in the UK can be hard to get your head around; our solicitors can break everything down into plain English and help you understand your position in UK law.
Contact our legal assessment team today for a free case evaluation and no-obligation quote for the services of the best lawyer in our network for your case.