We get a lot of questions about how cryptocurrencies (also called ‘cryptoassets’) are treated by HMRC. So, we decided to put a short piece together, linking out to relevant resources from HMRC.
Cryptocurrencies are not considered as money or currency by HMRC (see the Cryptoasset Taskforce report, 2018).
The taxation of cryptocurrencies in the UK depends on the type of cryptoasset, of which HMRC has identified 3 variants: exchange tokens, utility tokens, and security tokens.
We are concerned with HMRC’s exchange tokens, which are those intended to be used as a payment method, e.g. Bitcoin.
As such, Capital Gains Tax is the primary form of taxation on cryptocurrencies in the UK, which is paid at the time of disposal of the asset. You may also be liable to pay Income Tax and National Insurance Contributions (NICs) if you receive cryptocurrencies from your employer as a type of payment, or if you participate in mining or receive cryptocurrency via airdrops.
What taxes do I need to pay?
One way to understand how your cryptocurrency gains may be treated by HMRC is to ask the following questions:
- Are you a cryptocurrency miner?
- Have you received your cryptocurrency as a form of non-cash payment from an employer?
- Did you receive your crypto from an airdrop?
- Are you frequently trading cryptocurrencies as a key form of income?
If you answered YES to any of the above, you may be liable to pay Income Tax and National Insurance Contributions (as well as Capital Gains Tax) on your cryptocurrency gains. However, this is a grey area acknowledged by HMRC themselves, and many individuals will still be excluded from Income Tax and NICs even under some of the above conditions. As such, you should seek advice from a professional.
If you answered NO to all of the above, you should only need to consider Capital Gains Tax
Capital Gains Tax (CGT)
In almost all cases, gains realised when disposing cryptocurrencies are taxable under Capital Gains Tax. Despite being an intangible asset, cryptocurrencies are still classified as chargeable assets.
You will calculate your gain or loss when disposing of your cryptocurrency. A disposal is not only a sale, but can be:
- Sale of the cryptocurrency for fiat currency (GBP, USD, EUR, etc.)
- Exchange of the cryptocurrency for another cryptocurrency (e.g. BTC -> ETH)
- Paying for goods or services with cryptocurrency (e.g. shopping at an online store that accepts BTC)
- Gifting cryptoassets to others
You may donate your cryptocurrency to charity without paying CGT, in accordance with regular charitable giving rules.
The Capital Gains Tax allowance is £12,000 for the 2019-20 tax year. This means that if your Gain is less than £12,000, you do not need to pay CGT. Any gain above £12,000 will be taxed at 20%.
When calculating whether you have made a gain or loss at the point of disposal, you should take into account any of the following costs:
- The price you originally paid for the cryptoasset (in GBP)
- Any transaction fees you paid
- And, less frequently:
- Any money spent advertising to find a purchaser of your cryptoassets
- Any money spent on hiring a professional to draw up a contract for the purchase or disposal of the cryptoasset
- Costs related to calculating the gain or loss
|2 BTC purchased @ £6,000||-£12,000|
|2 BTC sold @ £8,000||£16,000|
The above is a simple example. In order to calculate the CGT owed, there are a number of methods you may use which will depend on your individual case. See the HMRC guidance, and/or consult an accountant or financial adviser, to understand how to best understand your situation.
Many people are able to carry forward losses to later years. See HMRC Helpsheet HS325.
You can report CGT at any time using HMRC’s online tool, or as part of an annual Self Assessment tax return. You are required to keep records of all transactions for at least a year.
Top tip: Don’t rely on exchanges to keep records of your buys/sells/trades. You should keep your own records of the type of cryptocurrency bought/sold, the date, quantity, GBP value of the transaction, etc.
This content does not constitute financial or legal advice.