Cryptocurrencies have gained immense popularity in recent years, attracting both seasoned investors and newcomers to the world of DeFi (Decentralised Finance).
Cryptocurrency is a digital or virtual form of currency typically decentralised through blockchain technology and operates independently of a central bank, making paying tax not as straightforward.
As the adoption of digital currencies increases, so does the need for clear and concise tax regulations. This is why our team has put together an informative guide to help you understand crypto tax regulations in the UK.
How does HMRC classify crypto tax?
There isn’t an official crypto tax. HMRC classifies cryptocurrencies as assets, not currency. This classification affects how cryptocurrencies are taxed, with different rules applying to capital gains and income.
Individuals involved in cryptocurrency transactions whether for speculative or investment purposes are subject to existing tax laws and need to consider the potential implications for capital gains or income tax arising from their crypto transactions. For companies in the space, this could take the form of corporation taxes or again capital gains tax.
Understanding Capital Gains Tax (CGT)
CGT is the most common tax on crypto and is obligatory when you dispose of cryptocurrency and it results in a capital gain, as you’re essentially selling an asset. This applies to companies and individuals who purchase and sell crypto assets as part of their individual or corporate treasury strategy.
This also applies when the profit of selling your crypto exceeds £3,000 in the 2024/2025 tax year. It doesn’t apply when you’re transferring your crypto assets to your spouse or civil partner or when you’re donating your crypto to a charity.
Certain Decentralised Finance (DeFi) transactions may incur capital gains tax if they involve a change in beneficial ownership.
Taxable events may include:
- Selling cryptocurrency for fiat currency (e.g., GBP, USD)
- Exchanging one cryptocurrency for another (e.g. ETH for BTC)
- Using cryptocurrency to pay for goods or services
- Gifting cryptocurrency (excluding gifts to a spouse or civil partner)
CGT allowances and rates:
- The annual CGT allowance for the tax year 2023/24 is £6,000. Gains up to this amount are tax-free. This is £3,000 for the year 2024/25.
- Gains above the allowance are taxed at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers as a rule of thumb.
- Not all investments yield gains. Some result in capital losses, which are not subject to Capital Gains Tax (CGT).
- In the UK, you can offset unlimited capital losses against gains, reducing them to the £6,000 tax-free allowance for 2023/24, therefore avoiding CGT. These CGT losses can be carried forward indefinitely by registering them on your self assessment tax return for individuals and corporate tax returns for companies.
Understanding crypto income tax
Certain cryptocurrency transactions are treated as income and attract income tax or corporate tax in the UK. These include but are not limited to:
- Getting paid in crypto – Considered “money’s worth” and subject to National Insurance contributions. For companies, if proceeds of a sale are received in cryptocurrency, that will be subject to normal rules of corporate tax.
- Staking rewards – Income from staking cryptocurrency is considered taxable income and is subject to your standard income tax rate.
- Mining tokens – Income from mining cryptocurrency is considered taxable income and is subject to your standard income tax rate.
- Airdrops – Cryptocurrency received through airdrops is typically taxed as income at your regular income tax rate.
Income from these activities is taxed at your regular income tax rate. The amount of tax owed depends on various factors, such as the type of transaction and the specific reward received. In some cases, National Insurance contributions are also required.
How much tax will you pay on crypto income?
The tax you pay on cryptocurrency income in the UK depends on your total income and tax bracket. Income from cryptocurrency is taxed at standard income tax rates: 20% for the basic rate, 40% for the higher rate, and 45% for the additional rate. National insurance contributions apply at their standard rates.
How do you calculate crypto tax obligations?
Calculating your crypto tax obligations involves several steps:
- Identify taxable events: Determine which transactions are taxable (e.g., selling crypto, trading one crypto for another, using crypto to purchase goods/services, mining, staking, and receiving airdrops).
- Record transactions: Keep detailed records of each transaction, including date, value in GBP, and the nature of the transaction.
- Calculate gains and losses: For each taxable event, calculate the gain or loss by subtracting the cost basis (original purchase price) from the value at the time of the transaction.
- Apply allowances and rates:
- Capital Gains Tax (CGT): Deduct the annual CGT allowance (£6,000 for 2023/24). Apply the CGT rate on gains above the allowance.
- Income tax: Income from activities like mining, staking, or getting paid in crypto is taxed at your regular income tax rate (20%, 40%, or 45%).
- Report on self-assessment: Include all gains and income in your self-assessment tax return, ensuring you meet the reporting deadlines (31 October for paper returns, 31 January for online returns).
- For companies: The steps from 1-4 remain the same. For companies, consider deductible expenses or brought forward capital losses from previous years before bringing a “gain” value on your company tax return.
- Offset Losses: Use capital losses to offset gains, potentially reducing your tax liability. Register losses with HMRC, even if below the CGT allowance, to carry them forward.
What recordkeeping is needed for crypto tax?
HMRC mandates detailed record-keeping for all cryptocurrency transactions. We recommend you keep track of the following:
Transaction details
- Date of each transaction
- Type of transaction (buy, sell, trade, etc.)
- Form of cryptocurrency (ETH, BTC,stablecoins etc.)
- Quantity of cryptocurrency involved
- Value of the transaction in GBP
- Relevant parties involved (if applicable)
- Transaction fees incurred
Additional information
- Receipts and invoices (or screenshots from wallets) for purchases and sales
- Records of all crypto-to-crypto or crypto-fiat trades
- Documentation for mining, staking, and airdrop activities
- Records of income received in cryptocurrency
Calculations
- Cost basis calculations for each transaction
- Gains or losses from each transaction
Documentation for specific events
- Forks and airdrops: Document the nature and timing
- Gifting and donations: Keep records of the recipients and the value at the time of the transaction
Crypto tax UK FAQs
Here are the questions our crypto tax experts get asked the most.
Do I have to pay tax on all my crypto transactions?
Yes, most crypto transactions such as selling, trading, and using crypto for purchases are taxable events subject to capital gains tax (CGT) or income tax.
What is a taxable event in crypto?
Taxable events include selling crypto for fiat, trading one crypto for another, using crypto for purchases, and earning crypto through mining, staking, or airdrops.
How do I report crypto taxes?
Report crypto taxes on your self assessment tax return. This needs to be filed online by the 31st of January or on paper by the 31st October following the tax year. For companies, you have 12 months following the end of your financial year to report and pay any corporate taxes. In practice though, most companies combine the filings on Companies House and HMRC together by the 9-month mark after the end of the financial year. This is because Companies House has a deadline for company annual returns that fall 9 months after the year end date.
Are there any tax-free crypto transactions?
Yes, gifts to spouses or civil partners and donations to registered charities are typically tax-free. However, these rules change often so we recommend checking the latest HMRC guidelines before deciding your tax position.
Can I offset crypto losses against gains?
Yes, you can offset capital losses against gains, potentially reducing your taxable amount. Register losses on your self assessment tax or corporate tax return to carry them forward.
Do I need to pay National Insurance on crypto income?
Yes, certain crypto incomes, such as payments in crypto in lieu of salaries, would require National Insurance contributions.
When do I pay tax on crypto uk?
UK crypto events must be reported in your self assessment tax return by the deadlines: 31 October for paper returns and 31 January for online returns.
What happens if I don’t report my crypto gains and losses in the UK?
If you don’t report your crypto gains and losses in the UK, you could face penalties, interest charges on unpaid taxes, fines for inaccurate returns, and increased risk of HMRC audits. Persistent non-compliance can lead to legal action and missing out on opportunities to offset losses against future gains.
How can EVALUA8 help you organise your crypto tax?
At EVALUA8, we offer specialised crypto tax accounting to help you maintain records that help to navigate the complexities of cryptocurrency taxation in a way that doesn’t massively eat into your time. Through our services, our team ensures your crypto transactions are accurately reported and compliant with UK tax regulations.
These crypto tax services include detailed transaction reporting, integration with crypto tax software, and strategic tax planning to optimise your financial strategies. By simplifying compliance and offering proactive tax planning, we help you manage your crypto assets efficiently and reduce tax-related risks.
Final thoughts
Navigating the complexities of cryptocurrency taxation in the UK is essential as crypto currencies continue to grow in popularity. Naturally, confusions arise as you manage your crypto tax which is why advice from an expert is invaluable.
At EVALUA8, our specialised crypto tax accounting services help investors to effectively manage their tax obligations, optimise financial strategies, and mitigate risks. By staying informed and proactive, crypto investors can ensure they meet their tax responsibilities and focus on maximising their investments.
Book a clarity call today to see how we can help you manage your crypto tax.
