How Crypto Tax works in the UK (a summary)

With great potential comes great responsibility – yes, we’re talking about your crypto and taxes. Understanding how your crypto activities are taxed in the UK is crucial for staying on the right side of the law and avoiding any unexpected bills. 

Whether you're a seasoned trader or just dipping your toes into the crypto waters, navigating the tax landscape can be tricky so we’ve done the hard work for you and put together this guide to help demystify crypto taxation in the UK. It’s not as scary (or as boring) as it sounds…

‍

Are cryptocurrencies taxed in the UK?

Yes, cryptocurrencies are taxed in the UK, similar to shares. HM Revenue and Customs (HMRC) views crypto assets as property, not currency, which means that your crypto activities could be subject to Capital Gains Tax or Income Tax, depending on what you're doing with them. 

The bottom line is that HMRC expects you to report and pay taxes on profits from buying, selling, trading, or earning crypto. Losses, on the other hand, can be used to offset profits. Let’s uncover more. 

‍

Types of taxable crypto activities

• Selling crypto for profit
• Trading one cryptocurrency for another (including stablecoins)
• Using crypto to pay for goods or services
• Mining or staking rewards
• DeFi activities

HMRC has recently shared some thoughts on DeFi activities like lending and staking. It's not exactly crystal clear yet, but in a nutshell, they're saying DeFi transactions could be taxed as either Income Tax or Capital Gains Tax. It all depends on the "nature of the transaction".

Here's the gist: If you're moving your crypto around in a way that looks like you're selling it, even if you can get it back later, it might count as a capital transaction. This could include:

• Adding or removing your crypto from a liquidity pool, if the DeFi platform gets to use your funds.
• Staking your crypto through a DeFi protocol. But watch out – the rewards you earn from staking might be taxed as income.

It's a good idea to keep detailed records of all your DeFi activities, just in case.

Here's some good news: You're not taxed on every penny when you sell or trade your crypto. You only pay tax on the profit – that's the extra money you've made compared to what you originally paid. So if you're not making a profit, you're not paying tax.

‍

How crypto is taxed in the UK

When it comes to crypto taxation in the UK, you'll mainly deal with two types of taxes: Capital Gains Tax (CGT) and Income Tax.

Capital Gains Tax applies when you make a profit from selling or trading your crypto. Think of it like selling a valuable painting – if you sell it for more than you bought it, you pay tax on that profit. 

The good news is, you get a tax-free allowance. A tax-free allowance is the amount of income or gains you can earn before you have to start paying tax, so if you make £1,000 profit and your tax allowance is £3,000, you do not need to pay tax on that. However, it’s important to know that this allowance has been changing over the years. 

For the 2023-2024 financial year, it was reduced to £6,000 from the previous £12,300. And from April 2024, it halved again to £3,000. Once your profits exceed this allowance, you'll pay either 10% or 20% on your gains, depending on your overall income.

If you earned:

- less than £50,270 (total income) - you'll pay 10% on crypto gains. 

- more than £50,279 (total income) - you'll pay 20% on crypto gains.

Income Tax, on the other hand, applies to crypto you earn. This could be from mining, staking rewards, or getting paid in crypto for goods or services. HMRC treats this like any other income – it's added to your total earnings for the year and taxed at your usual rate. 

If your crypto income pushes you over your personal allowance, you could be looking at tax rates between 20% to 45%, depending on which tax band you fall into.

Keep in mind that you might need to pay both types of tax if you're involved in different crypto activities. For example, if you mine crypto (Income Tax) and then sell it at a profit (Capital Gains Tax). The exact amount you'll pay depends on the specific transactions you've made and your overall financial situation.

‍

What if you made a loss?

Not every investment goes your way, and luckily, capital losses aren’t hit with Capital Gains Tax. In the UK, you can offset those losses against any gains, which could help bring them down to the £3,000 tax-free allowance for 2024/25—meaning no CGT to worry about. Plus, you can carry those losses forward indefinitely by reporting them in your self-assessment tax return.

‍

Even if your gains are under the threshold and you don’t usually file a return, it’s a good idea to register the losses now so you can use them in the future. Just remember to include them when submitting your tax return to HMRC.

‍

How does income tax for crypto work?

To calculate how much tax you'll owe on your crypto income, you'll need to know the crypto Income Tax rates. These follow the same tax bands as your regular income. To be clear, in the UK, crypto is taxed as income if it comes from:

• Getting paid in crypto (called 'money's worth') – this also includes National Insurance.
• Staking rewards.
• Mining tokens.
• Most airdrops.

These earnings are treated like any other income and are taxed accordingly.

When it comes to DeFi, Income Tax applies to 'returns' from activities like staking, yield farming, or lending, as these could be considered income. HMRC says it's likely to be taxed as income if:

• The return is agreed upon rather than speculative.
• The return is paid by the borrower or DeFi platform.
• The return is paid periodically during the lending or staking period.

So, if you're earning new coins or tokens—such as through an agreed APY on a DeFi protocol—it’s likely to be seen as income. This includes earning tokens through yield farming on platforms like AAVE or Compound, or getting new liquidity pool, governance, or reward tokens.

‍

Does HMRC have access to your crypto transactions?

Yes, HMRC isn't in the dark about your digital dealings. They've got their ways of tracking cryptocurrency:

• They're teamed up with UK exchanges to share data.
• They've got records of crypto transactions dating back to 2014.
• Remember that identity verification check you did? HMRC has access to that info too.

Recently, HMRC's been waving a bit of a red flag. They're urging crypto holders to come clean about any unpaid taxes voluntarily, they’ve even created a new service for declaring these taxes. The message is clear: speak up now, or you might face extra charges later.

This isn't just a UK thing. Soon, the UK will be swapping notes with other European countries about crypto transactions. It's all part of something called CARF regulations.

Now, if you're wondering how far back HMRC might dig, it depends on your track record:

• If you've been trying your best but made a mistake: 4 years.
• If you've been a bit careless: 6 years.
• If you've been deliberately hiding things: up to 20 years.

The takeaway? HMRC's getting serious about crypto taxes. It's better to stay on top of things now than face surprises later.

‍

What to keep a record of for crypto taxes

Keeping detailed records of your crypto transactions is probably the best way of staying on top of your tax obligations and it’s probably best to keep these in real-time instead of trying to dig up the information when filing your tax. 

You’ll need to track key details like: 

• Dates
• Amounts
• Values in GBP at the time of the transaction
• Purpose of each transaction (buying, selling, staking, etc.). 

Proper record-keeping makes it easier to calculate any profits or losses and ensure you’re paying the correct tax. HMRC expects accurate reporting, so having everything documented can save you from future headaches or unexpected tax bills.

‍

Are any crypto transactions tax-free?

Yes, some crypto transactions are tax-free in the UK. You won’t pay tax on things like:

• Buying crypto with GBP.
• Holding onto your crypto (HODLing).
• Transferring crypto between your own wallets.
• Donating crypto to charity.
• Gifting crypto to your spouse (worth considering if they have not taken advantage of their tax allowance).

‍

How to calculate your crypto tax in the UK

Calculating your crypto taxes can be time-consuming, especially if you trade frequently, so keeping these records up to date (weekly, monthly) will be your best bet. Here’s what you need to do:

1. List all your taxable crypto transactions for the financial year.
2. Separate those subject to Income Tax from those under Capital Gains Tax.
3. Use the Share Pooling Cost Basis Method to find the cost base for each transaction.
4. Work out your capital gains, losses, income, and expenses.
5. Subtract any net capital losses from your net capital gains.

If your gains are below the £3,000 allowance (for 2024/25), you’ll only need to report if your disposal proceeds exceed £49,200 or if you're registered for Self Assessment. 

For gains above the allowance, reporting to HMRC is mandatory. It’s a bit of a process, but a crypto tax calculator can make it easier.

‍

How to report crypto taxes to HMRC

When it comes to reporting your crypto taxes, you’ll need to do it through HMRC’s Self-Assessment tax return. You’ll file your crypto taxes as part of your Self Assessment Tax Return and then the HMRC uses this to figure out how much tax you owe.

• Report crypto gains and losses on SA100 and the Capital Gains Summary (SA108).
• Report crypto income in Box 17 of the SA100.

Keep an eye on the deadlines, though. The tax year ends on 5 April, and the deadline for paper returns is 31 October, while online submissions are due by 31 January of the following year. 

Missing these deadlines can lead to penalties, so it’s a good idea to stay on top of things and get your return in on time!

‍

Common challenges in crypto taxation

Navigating crypto taxes can get tricky, especially when you're dealing with multiple exchanges. We know that keeping track of all your transactions across different platforms can be a headache, but it’s important to maintain detailed records to avoid misreporting and the consequences that might follow.

Another challenge is handling lost or stolen crypto. Unfortunately, HMRC doesn’t let you claim a capital loss for stolen crypto, but if you’ve lost access to it (like losing a private key), you might be able to claim it as a negligible value. That way, you can still potentially offset future gains. Be sure to check the fine print. 

‍

Good luck

While it might seem like a headache, the whole process is a positive step forward for the integration of crypto in mainstream finance, and, despite your political views, paying taxes is an honourable and important aspect of community living. 

This article is for informational purposes only and should not be considered tax advice, rather to provide a summary of crypto taxation in the UK. The information in this article is accurate as of August 2024. Tax regulations can change quickly. We recommend consulting a qualified tax advisor to address your specific circumstances and stay compliant with the latest regulations.

‍