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.
It is essential to pay taxes on the profits you make from various cryptocurrency activities. In October 2020, Coinbase was asked to hand over data on UK customers who transacted more than £5000 from 2017 to 2019. HMRC expects complete compliance as they make clear rules on taxes.
What taxes do I need to pay for Crypto in the UK?
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?
-
Have you participated in any ICO or IEO?
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.
Tax-Free Allowance
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%.
Allowable Costs
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
Example
| 2 BTC purchased @ £6,000 | -£12,000 |
| 2 BTC sold @ £8,000 | £16,000 |
| Transaction fees | -£50.00 |
| Gain (sold-purchase)-costs | £3,950 |
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.
Reporting CGT
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.
Cryptocurrency taxes on Mining in the UK
HMRC classifies miners into two separate categories: Hobby Miners and Serious Miners. Depending on which category you fall under, you’ll have different tax rules.
Hobby Miners
A hobby miner uses their existing computing power to mine for cryptocurrencies during the spare time. The money made from it is to be declared as “Miscellaneous Income” in the tax return. You also get to deduct expenses such as electricity. However, if you sell the mined crypto at a later date and make a further profit, that will be subject to capital gains tax.
Serious Miners
These are the miners who purchase computing equipment specifically for the purpose of mining. It includes ASICs and GPU mining rigs. HMRC considers this as a trading activity, where the money spent on the equipment is your capital, and the profit from mining is taxable. Similar to hobby miners, serious miners will also have to pay an additional tax if the value of the currency they mined appreciates while selling.
Cryptocurrency Taxes on Staking in the UK
While previously Staking was a gray area, staking was recently updated to include it in the tax guidelines by HMRC. However, there is still not much clarity. Staking is considered similar to mining. So the tax is different for people who stake as a hobby or do it commercially.
However, it is not clearly defined how to differentiate between hobby and commercial staking. The expectation is that with HMRC recognizing staking, we’d have more explicit rules soon.
Taxes on Cryptocurrency Airdrops
Individuals receive airdrops as marketing campaigns by cryptocurrency projects. It involves the receiver doing particular tasks or something as simple as entering their wallet address. Cryptocurrencies accepted through airdrops are taxable in the UK. If you’re a business, it can be classified as miscellaneous income or trading profits and then taxed. If you’re an individual, it comes under capital gains tax.
Cryptocurrency Donations
Cryptocurrencies are growing in popularity, and an increasing number of charities already accept them. Individuals are entitled to file for tax reliefs for these donations. However, it is taxable if the individual sells the cryptocurrency for a profit to the charity or receives a kickback from the charity for their donation. In these cases, various taxes apply.
Taxing wages and earnings made through cryptocurrencies
HMRC does not recognize cryptocurrencies as legal tender. However, you will still be taxed if you accept payments through cryptocurrencies. It includes monthly salaries or income from freelance gigs. It will be added to your taxable income, and you’ll have to pay tax on it if you made more than the threshold of £12,000 in the year. This also applies to businesses. If you receive cryptocurrencies as money for your goods or services, it will be taxed.
Taxes on ICOs and IEOs
ICOs (Initial Coin Offerings) or IEOs (Initial Exchange Offerings) let investors invest in startups through cryptocurrencies. Usually, they’re more open and accessible to average investors. While their popularity has come down significantly in recent times, they still happen. A lot of good startups still raise money through ICOs and IEOs.
This process of investing in ICO is considered investing in any other cryptocurrency such as Bitcoin. Therefore, you will be subject to capital gains tax while paying for the new cryptocurrency you will receive from the investment. Similarly, you will also be taxed if the value of the new coin appreciates and you make a profit while selling it.
Tax on Crypto Gifts
While giving out cryptocurrencies as gifts, both the giver and the receiver could be liable for taxes. At the date of giving, the person who’s gifting will be liable to calculate capital gains tax if the value of the cryptocurrency is more than the price they acquired it for. Similarly, the receiver is not liable to pay any tax if they sell it immediately. However, if they hold on to it and sell it for a profit at a later date, they’ll have to pay capital gains tax on the profit.
Tracking Cryptocurrency for Taxes
As you can see from above, HMRC has different taxes for different activities. If you’re a hobbyist or occasionally trade cryptocurrencies, it might be easy to make these calculations. However, if you’re a regular trader or a day-trader, it can go from incredibly hard to impossible to calculate manually. Different exchanges have different reporting levels, and it is up to the user to keep track of their transactions.
But the good news is that the cryptocurrency market has come so far that there is an abundance of softwares that keep track of everything automatically. Koinly and Cointracking are some of popular services that are available for people in the UK. You can directly connect your wallet and exchange accounts for them to automatically track your trades and generate income reports during tax season. Both even offer free tiers for you to try them out first.
Disclaimer
This content does not constitute financial or legal advice.