Cryptocurrency is a digital or virtual currency that uses cryptography for security. Unlike traditional currencies governments and central banks issued, cryptocurrencies operate on decentralised networks based on blockchain technology. But how is crypto taxed in the UK?
The UK government has stated that cryptocurrencies are not considered legal tender, but you can legally use cryptocurrencies to pay for goods and services in the UK.
Therefore, you’ll have to pay personal tax and/or Capital Gains Tax (CGT) based on the nature of your crypto transaction. So, if you are not sure where to start? This article will provide you details in depth about different crypto taxes in the UK.
How Is Crypto Taxed In The UK?
According to His Majesty’s Revenue and Control (HMRC) rules and regulations, crypto assets like cryptocurrency or NFTs are taxable in the UK.
HMRC does not consider such assets equivalent to currency or money and treats them as assets for tax purposes. Hence, depending on the type and nature of your transactions, you may need to pay CGT or income tax on your crypto asset as cryptocurrency tax in the UK.
Capital Gains Tax On Crypto In The UK
Before explaining how CGT works in the UK, let’s first understand it. CGT is a tax applicable on the profit you make when you sell or dispose of a crypto asset that has increased in value. As per HMRC, you will have to pay CGT in the following disposal circumstances:
- Selling of cryptocurrency in exchange for fiat currency such as GBP
- Trading one crypto for the other
- Spending cryptos to avail of goods and services
- Gifting cryptos to someone who is not your spouse or a civil partner.
However, it is crucial to note that you do not have to pay tax on the entire amount but only on the capital gain you have enjoyed after disposing of the crypto asset. Moreover, the HMRC also allows a tax-free bandwidth.
Capital Gain Tax-Free Allowance In The UK
You have a tax-free allowance of £12,300 for the 2021 to 2022 tax year. However, per the recent notification of HMRC published in April 2023, the tax-free allowance gets reduced to £6,000 for FY 2023-2024 and £3,000 for 2024-2025.
The tax-free allowance means you only pay CGT if your gains exceed the respective amount. The rate of CGT you pay depends on your income tax band, i.e., you pay 10% if you are a basic rate taxpayer or 20% if you are a higher or additional rate taxpayer.
Capital Gain Tax Rates In The UK
In the UK, capital gains are subject to taxation using the tax rates defined based on income bands. These tax rates are as follows:
Tax Rate | Taxable Income |
10% | If your income is up to £50,270, i.e., falls under the Basic Rate Income Band. |
20% | If your income is up to £150,000, i.e., falls under the Higher Rate Income Band. |
20% | If your income exceeds £150,000, i.e., falls under the Additional Rate Income Band. |
Hence, if your income falls below £50,270, you will be taxed at 10% on your cryptocurrency gains. However, if your income surpasses £50,270, your tax rate for crypto payments will be 20%. As you have understood the CGT implications, let’s now understand how personal taxation works on crypto assets.
Personal Tax On Crypto In The UK
Personal tax is the tax you pay on your income from various sources, such as employment, self-employment, property, savings, dividends, or crypto. As per HMRC, certain crypto transactions are subjected to personal tax implications.
Crypto Transactions That Invite Personal Tax In The UK
Such transactions are as follows:
Crypto Received As Salary/Income
When you receive cryptocurrency as payment for goods or services, it’s considered your regular income, similar to receiving traditional currency. This means you’re liable to pay income tax and National Insurance on the value of the cryptocurrency received.
Staking Rewards
If you engage in staking cryptocurrency as a regular activity, the value of your rewards is treated as income. This income is subject to income tax, but you can deduct appropriate expenses before calculating your taxable amount.
Suppose you receive staking rewards sporadically and not as part of a regular activity. In that case, their pound sterling value at receipt will be treated as miscellaneous income and taxed accordingly based on Income Tax bands.
Income From Mining
The tokens you earn through cryptocurrency mining activities are considered income according to HMRC guidelines. Like staking, income tax applies to these tokens after deducting eligible expenses.
Income From Airdrops
Airdrops, tokens received in your account as part of a marketing campaign or due to holding a similar token for an extended period, may also be subject to income tax.
Suppose you receive airdrops in exchange for providing a service or a product. They will be treated as income related to your existing trade or miscellaneous income. Consequently, you’ll have to pay income tax.
However, as per HMRC guidelines, you are not required to pay tax on cryptocurrencies received as airdrops in the following circumstances:
- If the airdrops are received without providing any services or products in exchange, they are received passively without any active participation on your part.
- If the airdrops are not received as part of a trading activity involving cryptocurrency exchanges, indicating that they are not directly related to trading or investment activities.
Personal Tax Rates In The UK
The personal tax rates that apply to your income depend on the bandwidth of your income. Moreover, the tax rates in the UK are very progressive, i.e., your income is divided into different tax bands, and you pay a progressively higher tax rate as your income falls into higher tax bands.
It’s important to note that you don’t pay the highest tax rate on your entire income. Each portion of your income within a specific tax band is taxed at the corresponding rate for that band.
Personal Tax Rates And Thresholds
The table shows the personal tax rates and their respective income thresholds.
Tax Rate | Income | Income Tax Band |
0% | up to £12,570 | This is part of the Personal Allowance Tax band. |
20% | on income between £12,571 and £50,270. | This is part of the Basic Rate Tax band. |
40% | on income between £50,271 and £125,140. | This is categorised as the Higher Rate Tax band. |
45% | on income above £125,140. | This is included in the Additional rate Tax band. |
It’s worth noting that the £12,570 personal allowance will not be available to you if you earn more than £125,000 annually. Moreover, it is reduced for those with incomes exceeding £100,000.
Tax-Free Crypto Event
A tax-free crypto event is a transaction that does not result in a gain or loss from the disposal of crypto assets for tax purposes. There are different types of tax-free crypto events in the UK.
Buying And Holding Cryptocurrency
Buying and holding cryptocurrency is not taxable, i.e., you do not need to pay any CGT when buying and holding cryptocurrency in a wallet.
Transferring Cryptocurrency Between Your Wallets
Transferring cryptocurrency between your wallets is not a taxable event. You do not need to pay CGT when transferring cryptocurrency between your wallets.
Receiving Cryptocurrency As A Gift
Receiving cryptocurrency as a gift is not taxable. This means that you do not need to pay any CGT when you receive cryptocurrency as a gift from someone else.
Donating Cryptocurrency To A Charity
Donating cryptocurrency to a charity is not a taxable event, i.e., you do not need to pay CGT when you donate cryptocurrency to a registered charity.
Donating Cryptocurrency To A Charity
You do not have to pay taxes if you give a spouse or civil partner cryptos. This transaction is considered a no-gain, no-loss transaction, i.e., the value of crypto at the time of gifting equals the value of crypto at the time of acquisition, resulting in a net financial impact of zero.
To prove such tax-free events in front of HMRC, you need to keep intact all the details of transactions, along with the value of the crypto assets at the time of acquisition and disposal.
Tax On Crypto Mining
Cryptocurrency mining is like solving puzzles to help keep a digital ledger, known as blockchain, secure. People who do this work are called miners and are paid in terms of the respective cryptocurrency for their efforts.
In the UK, how you’re taxed for crypto mining depends on whether it’s a hobby or a business. There are several factors through which you can determine whether you are doing it as a hobby or mining crypto as a business.
Factors To Determine Hobby Or Business Mining
Whether or not a particular mining activity is considered hobby or business mining will depend on several factors, including:
- Degree of activity: How much time and effort do you put into mining? If you are mining full-time or investing significant resources into mining, it is more likely to be considered a business.
- Organisation: How organised is your mining operation? Do you have a dedicated mining rig or space? Do you keep track of your expenses and income? This suggests that you are taking mining more seriously, which is more likely to be considered a business.
- Risk: How much risk are you taking? Suppose you are investing a lot of money into mining hardware or cryptocurrency. In that case, this suggests that you are taking mining seriously and that it is more likely to be considered a business.
- Commercialism: Are you trying to make money from mining? If you are selling the cryptocurrency that you mine or using it to provide goods or services, this suggests that you are mining as a business.
Now that you have learned how to differentiate between hobby and business mining let’s get aware of the taxation on both.
Taxation On Mining As A Hobby
Hobby mining is the process of mining cryptocurrency as a leisure activity rather than a business. It is typically done on a small scale, using personal computers or other consumer-grade hardware.
If your mining activity is considered hobby mining, the income you generate from mining will be taxed as miscellaneous income. It means you must declare the income on your tax return and pay income tax. However, you will also be able to deduct any allowable expenses from your income, such as the cost of electricity and mining hardware.
Moreover, if you dispose of the mined crypto at a gain, you will be liable to CGT on the said transaction.
Taxation On Mining As A Business
Mining crypto as a business means that you are mining cryptocurrencies with the intention of making a profit. It involves mining on your account or running a mining pool where you provide mining services to others.
As per HMRC, if considered a business, your crypto mining activities will attract income tax on your mining profits. This means that you will pay income tax on the fair market value (FMV) of the cryptocurrencies you mine when you receive them.
Your income tax rate will depend on your overall income tax bracket. In addition to income tax, you may be liable to pay CGT on any profits you make from selling the minted cryptocurrencies.
Example: Hobby Mining
Alice is a hobby miner. She mines Bitcoin on her home computer in the evenings and on weekends. Suppose Alice mines £1,000 worth of Bitcoin in a tax year, which will be included as miscellaneous income while reporting her income tax.
However, if she sells it for £1,200 after 4 months, her capital gains would be £200 (the difference between the price she paid for the Bitcoin and the price she sold it for). She then needs to pay tax on the said gain as per the income tax bracket.
Example: Business Mining
Bob is a business crypto miner. He runs a mining pool where he provides mining services to others. He makes a profit from his mining activities.
Bob’s crypto mining activities are considered a business for tax purposes. He has to pay income tax on his mining profits. He can also claim certain business expenses against his income, such as the cost of his mining hardware, electricity, and other business-related expenses.
Bob’s total crypto mining income in a tax year is £10,000, and his total business expenses are £5,000. This means that his net crypto mining profit is £5,000.
So, Bob’s income tax bill would be £1,000 (20% of £5,000).
Bob may also be liable to pay CGT for any profits from selling cryptocurrencies.
Let’s say Bob sells some of his Bitcoin for £10,000. His capital gains would be £5,000 (the difference between the price he paid for the Bitcoin and the price he sold it for).
Hence, Bob’s CGT bill would be £500 (10% of £5,000).
Tax On Crypto Gifting
Crypto gifting is giving cryptocurrency to another person. This can be done for various reasons, such as providing a gift to a friend or family member who is not your spouse. Crypto gifting in the UK is seen as a method of crypto disposal and hence is subjected to CGT.
If you gift cryptocurrency to another person (who is not your spouse or a civil partner), you will have to pay CGT on any increase in value since you acquired the cryptocurrency. On the contrary, gifting cryptos to your spouse or any civil partner does not attract any tax as per the guidelines of HMRC.
Example:
Mark gave his friend Cary 1 Ethereum as a gift. When Mark bought that ETH, it was worth £40,000, but by the time he gifted it to Cary, its value had risen to £45,000. As Mark has gifted the crypto to a friend (who is not his spouse), this transaction will be liable to CGT.
To determine how much tax Mark might owe, he calculates the capital gain that Mark has enjoyed on the transaction. You find the difference between the value of the gift (£45,000) and what he originally paid for the ETH (£40,000). That’s £5,000, which is the capital gain.
Now, this gain will be subjected to CGT as per the said tax rates of Mark.
Tax On Crypto Donations
Crypto donations are charitable gifts made as cryptocurrency. As per the HMRC, crypto donations are a non-taxable event in the UK. This means you can donate your cryptocurrency to a charity without incurring any CGT liabilities on any gains it may have accrued.
However, suppose the charity decides to sell the cryptocurrency later and generates a profit from that sale. In that case, they may become subject to CGT on their profit.
It’s crucial to note that you should maintain a record of the cryptocurrency you have donated, along with details such as the date and FMV of the token at the time of the donation. This record-keeping is essential because you might be required to furnish this information to HMRC for taxation purposes.
Example:
John has owned 1 Bitcoin since March 2023. He originally bought the Bitcoin for £10,000, but its value increased to £20,000 in August 2023. He now donates the Bitcoin to the British Red Cross, a registered charitable institute.
Tax Implications For John
John will not pay any CGT on the donation, as he is gifting the Bitcoin to a registered charity. However, he must declare the gift to HMRC on his Self-assessment tax return. He can also claim Gift Aid on the donation, which will reduce his tax bill by the amount of Income Tax he would have paid on the market value of the donation.
Tax Implications On The British Red Cross
The British Red Cross will not pay any tax on receiving the Bitcoin donation. However, when they sell the Bitcoin and use the proceeds to fund their charitable work, they will be liable to pay CGT on the said transaction.
Tax On Crypto Airdrops
A crypto airdrop distributes cryptocurrency or tokens to many wallet addresses. New crypto projects often use airdrops as a sales technique to promote their tokens and build a community. As per HMRC, you must pay income tax on airdrops and CGT if you dispose of the same token at a profit. The purpose of receiving the airdrops is what drives the tax implications. These scenarios are:
- You receive tokens as a reward for participating in a marketing or advertising campaign. In this campaign, you are assigned tasks to complete and successfully finish.
- Additionally, you’ve obtained some crypto tokens because you already own a particular cryptocurrency.
- Furthermore, you’ve signed up to receive an airdrop on a specific platform.
In all of the said cases, you receive an airdrop in return for an activity performed; hence, you are liable to pay income tax on the airdropped token in the UK.
Moreover, the value of the airdropped crypto will be treated as miscellaneous income or trading income, depending on the circumstances. The Sterling market value of the crypto on the date of receipt will be taken as the taxable income liable to income tax.
However, if you receive an airdrop without doing any action or expectation, then you will not be liable to pay any income tax on the said airdropped token. Irrespective of the mode of receipt, if you decide to dispose of the airdrop token, you will become liable to CGT implications on the gain you earned through the transaction.
Example:
On 1st July 2023, you receive an airdrop of 200 UNI tokens, with an FMV of £2 each. So, the total value will be (200 x £2) £400 at the time of receipt. You received these tokens because you had conducted trades on Uniswap. This means your UNI tokens are subject to income tax. The £400 will be added as income to your income tax report.
However, if you decide to sell the crypto on the 2nd of September 203, when the price of UNI was £3, the cost proceeds of the token becomes £600. As you’ll be making a profit of £200 (£600 – £400), you will have to pay CGT on this amount.
Tax On Crypto Forks
Crypto forks are changes or updates to a cryptocurrency’s software that can create two separate and distinct versions of the cryptocurrency. There are two types of forks: hard and soft forks. Let’s find out how HMRC applies taxes on both the forks.
Soft Forks And Its Tax Implication
Soft forks are backwards-compatible changes to a blockchain protocol. This means that all nodes on the network will still be able to validate blocks and transactions, even if they still need to upgrade to the new software.
There is no tax implication as you do not receive any new assets from a soft fork.
Hard Forks And Its Tax Implication
When a cryptocurrency hard forks, you will receive a new coin for every coin you own on the original blockchain. This is essentially an airdrop, but how is it taxed in the UK?
HMRC has stated that you will not pay Income Tax on receiving new coins from a hard fork. However, when you later sell, swap, or gift these coins, you will be subject to Capital Gains Tax (CGT) on any profits.
Example:
Suppose you own 10 BTC before the Bitcoin Cash hard fork. After the fork, you will have 10 BTC on the original Bitcoin blockchain and 10 BCH on the new Bitcoin Cash blockchain, which is worth £500.
You will not pay any Income Tax on receiving the new BCH coins. However, if you later sell 5 BCH for £1,000, you will be subject to CGT on the £500 profit you have made.
Tax On Crypto Staking
Let’s now talk about the tax on crypto staking in the UK. Staking is locking up some crypto tokens in a network to participate in the consensus mechanism and earn rewards.
However, staking is not free from tax implications in the UK. According to the HMRC, staking rewards are taxable as miscellaneous income if you are earning interests as a hobby and trade income if you do it as a business.
In both cases, it is subjected to income tax at the time of receipt. The income tax amount depends on the reward’s sterling value and the marginal tax rate. Any allowable expenses, such as fees or commissions, can reduce the amount of taxable income.
Additionally, staking may also trigger CGT implication in two situations:
- When exchanging one token for another to participate in staking, this is considered a disposal of the original token and an acquisition of the new token. The difference between the sterling value of the tokens at the time of exchange will result in a capital gain or loss.
- Disposing of the staked tokens or rewards is also a taxable event for CGT purposes. The difference between the sterling value of the tokens at the time of disposal and the time of acquisition will result in a capital gain or loss.
Example:
Alice is a UK resident who earns £50,000 per year from her employment and decides to stake 10 Ethereum (ETH). She initially purchased the ETH for £20,000 on a DeFi platform that offers a 10% annual return. She exchanged 10 ETH for 10 stETH (staked ETH) on 1 January 2023, when 1 ETH is worth £3,000.
She receives 0.1 stETH as a monthly reward until 31 December 2023, when 1 stETH is worth £4,000. She then sells all her 11.2 (10 + 1.2) stETH for GBP.
Alice’s tax liability for the tax year 2023/24 is as follows:
Income Tax
Alice has received 1.2 stETH as a reward throughout the year, valued at £4,800 (£4,000 x 1.2) at the time of receipt. This amount is taxable as miscellaneous income, subject to income tax at a marginal rate of 40%. Therefore, she has to pay £1,920 (£4,800 x 40%) in income tax on her staking rewards.
Capital Gains Tax
Alice has two disposals that trigger CGT:
CGT 1
When she exchanged 10 ETH for 10 stETH, she realised a capital gain of £10,000 (£30,000 – £20,000), assuming she bought 10 ETH for £2,000 each in 2022. This gain is within her annual exempt amount of £12,500 for 2023-24, so she does not have to pay any CGT on this disposal.
CGT 2
When she sold 11.2 stETH for GBP, she realised a capital gain of £13,440 (£44,800 – £31,360), assuming she sold them for £4,000 each and paid no fees. This gain exceeds her remaining annual exempt amount of £2,500 (£12,500 – £10,000), so she has to pay CGT on the excess amount of £10,940 (£13,440 – £2,500).
Her CGT rate is 20%, as she is a higher-rate taxpayer and crypto assets are subject to higher rates than other assets. Therefore, she has to pay £2,188 (£10,940 x 20%) in CGT on this disposal.
Alice has to pay £4,108 (£1,920 + £2,188) in taxes on her crypto-staking activities for the tax year 2023/24.
Tax On Crypto Day Trading
Crypto-day trading has become popular among UK investors looking to take advantage of the volatile market. However, when it comes to taxes, things can get complex. HMRC, the UK’s tax authority, has not yet provided specific guidance on crypto trading products like margin trading, futures, and CFDs. But, the taxation rules for day trading offer a useful starting point.
Tax Categories For Crypto Traders
The type of tax you’ll pay largely depends on how HMRC classifies your trading activity. Broadly, there are three categories:
Speculative Trading:
If your trading is considered speculative, similar to gambling, you won’t have to pay any taxes. This would be an uncommon scenario, as it’s difficult to prove that day trading is speculative.
Self-Employed:
If you have day trading as your primary source of income, you’ll likely be classified as self-employed. In this case, you’ll be subject to Business Tax, just like any other sole trader or business owner.
Private Investor:
The vast majority of UK crypto investors fall under this category. If you’re working a regular job and trading crypto on the side, you’re considered a private investor. In this scenario, you’ll pay Capital Gains Tax on profits made from closing your trades. However, any losses can be offset against your gains to reduce your tax bill.
If you’re day trading frequently, HMRC may scrutinise your activity more closely to determine if it qualifies as a business.
Tax On Margin Trading
Margin trading is a popular strategy for crypto investors in the UK looking to amplify their market exposure. With margin trading, you’re essentially borrowing funds to open larger positions, which can result in higher profits or losses.
When it comes to tax, if you’re classified as a private investor, you’ll only pay Capital Gains Tax (CGT) on the profits from margin trades when you close your position. There is no immediate tax liability when you open a position. The gain or loss becomes real, and therefore taxable, only once you’ve exited the trade.
Liquidations, where your collateral is sold off to cover losses, are also considered a disposal for tax purposes. This means that you need to report these events to HMRC, as they may result in a taxable gain or loss.
Tax On Spread Betting
In the UK, spread betting is treated quite differently from most other forms of investment. It’s considered gambling rather than traditional trading or investing. Because of this classification, spread betting is not subject to Capital Gains Tax.
For UK crypto investors, this is important as it means that profits made from spread bets, including those on cryptocurrencies, won’t incur CGT, unlike other forms of crypto trading. This can offer a significant advantage for those looking to avoid tax liabilities on their profits.
HOwever, spread betting is a controversial topic in the UK, particularly when it comes to crypto. The Financial Conduct Authority (FCA) has banned the sale of crypto derivatives to retail consumers, which includes products like Bitcoin futures. Many exchanges have been forced to leave the UK because they refused to comply with these regulations.
Tax On Lost And Stolen Cryptos
The tax rules from HMRC about losing or having your cryptocurrency stolen could be more transparent. Unfortunately, HMRC does not consider lost or stolen crypto to be a disposal event for CGT purposes. This means you can only claim a capital loss on lost crypto once you can prove there is no chance of recovering it.
You can make a negligible value claim (NVC) to HMRC. If your claim is successful, HMRC will treat your crypto as having been disposed of and immediately re-acquired at a negligible value. This means that you can claim a capital loss on the difference between the original cost of your crypto and its negligible value at the time of the NVC.
Tax On NFTs
A non-fungible token (NFT) is a unique digital asset stored on a blockchain. NFTs can be used to represent ownership of a variety of items, including digital art, collectables, and even real estate.
NFTs are subject to two primary taxes in the UK: CGT and income tax.
Capital Gains Tax
CGT is applied to any profits you make when you sell, swap, or gift an NFT. The amount of CGT you pay, i.e., 10% or 20%, will depend on your overall taxable income.
Income Tax
Income tax is applied to any earnings you receive from your NFT activity. This could include earnings from selling NFTs, renting out NFTs, or receiving royalties from NFTs. The amount of income tax you pay will depend on your overall taxable income.
Some of the taxable events related to NFTs are:
- Buying NFTs with crypto is a CGT event, but buying with fiat is tax-free.
- Selling an NFT for crypto or fiat currency results in CGT on the gains.
- Swapping an NFT for another NFT is treated as a CGT event.
- Depending on frequency, earning NFTs through activities like yield farming may be subject to CGT or income tax.
- Gifting an NFT may lead to tax unless given to a spouse or civil partner.
- Airdrops received for holding NFTs are subject to income tax based on their fair market value (FMV).
- Staking NFTs can incur income tax based on the FMV of tokens received.
- Earnings from Play-to-Earn NFT games are taxed like cryptocurrency income.
Example:
As Bobby is a UK resident, he would be liable to pay capital gains tax on this gain. The amount of capital gains tax payable would depend on his other income and capital gains for the tax year.
For example, if Bobby has no other income or capital gains for the tax year, they would be liable to pay capital gains tax at 10%. This would mean they would have to pay £4,000 in capital gains tax.
However, if Bobby has other income or capital gains for the tax year, their capital gains tax rate may be higher. For example, if he has a total income of £100,000 for the tax year, they would be liable to pay capital gains tax at 20%. This would mean they would have to pay £8,000 in capital gains tax.
In 2021, Bobby purchased an NFT for £10,000 and then held the NFT for 6 months before selling it for £50,000. In this case, Bobby would have made a capital gain of £40,000.
Tax On DeFi Transactions
Navigating taxes on DeFi transactions in the UK can be tricky, but HMRC has provided some clarity. The key factor in determining the tax treatment is the nature of the transaction—whether it’s viewed as income or capital.
If your DeFi transaction involves an asset that increases in value and is later sold or disposed of, this is typically considered a capital gain. For example, adding or removing liquidity from a pool or staking crypto could now be considered as a “disposal” under HMRC rules. These disposals will likely be subject to Capital Gains Tax if your profits exceed the CGT allowance.
On the other hand, certain DeFi rewards may fall under Income Tax. If you’re earning returns regularly, such as staking rewards paid out periodically, HMRC is more likely to classify these as income. When the return is guaranteed or paid by the DeFi platform itself, it strengthens the case for treating it as income.
Here’s how different DeFi transactions are taxed in the UK:
Tax On DeFi Crypto Loans
DeFi (Decentralised Finance) crypto loans have specific tax implications under HMRC guidance in the UK. Whether you’re a lender or a borrower, it’s essential to understand how taxes apply to your activities in DeFi protocols.
As a lender, when you loan out crypto, HMRC treats this as a disposal, meaning it’s subject to Capital Gains Tax (CGT). If you know how much crypto you’ll receive in return for the loan, you must include this in your capital gains calculation. However, if the amount is uncertain, you can calculate it later.
When the loan term ends and you receive your crypto back, it’s considered an acquisition, but any returns, such as interest, are treated separately. Depending on how these returns are structured, they might be subject to Income Tax or CGT.
For borrowers, when you receive crypto as a loan, it is considered an acquisition, which is relevant for your tax reporting. Any interest you pay on the loan is treated as an allowable expense, which could reduce your tax liability.
When you repay the loan, this is treated as a disposition, and any increase in value from when you acquired the crypto to when you repay it may be subject to CGT.
Tax On Yield Farming
Yield farming has become a major trend in the world of DeFi. In essence, it involves lending or staking your cryptocurrency assets in exchange for rewards. These rewards can come in the form of interest, tokens, or even transaction fees, making it a potentially lucrative way to generate passive income. However, for UK crypto investors, it’s essential to understand how this income is taxed.
HMRC considers any rewards earned through yield farming as taxable income. This means that the fair market value of the crypto received on the day of the reward must be declared as income. You’ll likely be subject to Income Tax and possibly National Insurance contributions, depending on the total amount earned.
If you decide to sell or trade the crypto assets earned through yield farming, any profits made from this will be subject to Capital Gains Tax.
Tax On DeFi Staking
DeFi staking has become popular among UK crypto investors, but it comes with tax implications that shouldn’t be overlooked. According to HMRC, rewards earned from staking are considered miscellaneous income. This means you’ll be required to pay Income Tax on the value of those rewards at the time of receipt.
Additionally, when you dispose of the staked assets—whether by selling, trading, or exchanging—you’ll also need to pay Capital Gains Tax. The new HMRC guidance even considers the act of staking itself as a disposal, which could trigger CGT immediately. Make sure to track your staking transactions to avoid surprises when it’s time to file your taxes.
Tax On Liquid Mining
When it comes to liquid mining, HMRC has clear rules for UK crypto investors. Adding and removing liquidity is considered a Capital Gains Tax event. When you contribute crypto assets to a liquidity pool, you receive liquidity pool tokens in exchange, which inherit the cost basis of the assets you contributed. This means that when you later remove your liquidity, you’ll need to pay Capital Gains Tax on any profits.
However, there are situations where you might face Income Tax. If you receive new tokens as a reward for providing liquidity, HMRC may classify these as income. In this case, the value of the tokens at the time you receive them will be taxed as income. But if you receive liquidity pool tokens that increase in value, the tax obligation will occur when you remove your liquidity and realise those gains.
Tax On Crypto CFDs
CFDs, or Contracts for Difference, allow UK investors to speculate on the price movements of crypto assets without owning the underlying asset. The UK’s tax authority, HMRC, doesn’t offer specific guidance on how CFD trading in the crypto market is taxed. However, the rules for traditional financial markets can give us a good idea.
In most cases, profits from CFD trades are subject to Capital Gains Tax when the position closes. This means you only need to pay tax on the difference between your opening and closing positions. If your position is liquidated, HMRC views this as a “disposal,” and any gains will also attract CGT.
Though these rules apply to traditional markets, crypto CFDs might follow a similar approach. However, to avoid any confusion, it’s wise to consult a UK tax advisor for tailored advice on how your crypto CFD trading might be taxed.
Tax On Gas Fees
When you engage in cryptocurrency transactions, you often incur gas fees, which can add up over time. According to HMRC, these fees qualify as allowable expenses. This means you can include them when calculating your cost basis for tax purposes.
By incorporating gas fees into your overall expense calculations, you effectively reduce your taxable gains. This can be particularly beneficial for frequent traders or investors who often move their assets.
Transfer fees also fall under the category of allowable expenses in most cases.
Tax On Wrapped Crypto
Wrapped crypto refers to the process of converting one cryptocurrency into a token that can be used on a different blockchain. For example, if you wish to use Bitcoin (BTC) on an Ethereum-based platform, you must wrap your BTC. This process involves exchanging it for an ERC-20 token that represents the equivalent value of your original Bitcoin.
In the UK, the tax implications surrounding wrapped crypto transactions remain somewhat unclear. The HMRC has yet to provide definitive guidance on this matter. However, because wrapping involves swapping one cryptocurrency for another, it likely falls under the definition of a disposal. As a result, any gains realised from this transaction may be subject to Capital Gains Tax (CGT).
UK crypto investors must keep track of their wrapped transactions to ensure accurate reporting. Record the value of the original crypto and the equivalent wrapped token value at the time of the transaction. This information will help you calculate any potential gains or losses when it comes time to file your taxes. Additionally, understanding how wrapping interacts with your overall investment strategy is crucial for effective tax planning in the rapidly evolving crypto landscape.
How To Calculate Crypto Tax In The UK?
Crypto tax in the UK can be income tax or CGT. This section will explain how you can calculate both based on your transaction:
How To Calculate Income Tax On Crypto?
To determine how much tax you owe on the money you make from cryptocurrency, you must record all your crypto transactions and determine how much your cryptocurrencies are worth when you receive them as income.
Your total taxable income is the sum of all the tokens you get from mining, staking, getting free tokens, or earning interest.
How To Calculate Capital Gains Tax on Crypto?
To determine how much you gained or lost from your cryptocurrency transactions, do these steps:
- Find the Cost Base of Your Crypto: This is the money you used to buy/own the crypto, including fees.
- Find the Capital Proceeds of Your Crypto: This is the money you received when you disposed of the crypto.
- Calculate the Gain or Loss: Take the Cost Base from the Capital Proceeds. That’s your gain or loss.
Capital gain/loss = Capital Proceeds – Cost basis
If the value turns out to be positive, it’s a gain; if it’s negative, it’s a loss. You can use crypto tax reporting platforms such as KoinX to keep track of such.
How To Save Crypto Tax In The UK?
If you want to avoid crypto tax legally in the UK, you can follow the following strategies:
- Take advantage of your tax-free allowances. You have a capital gains tax (CGT) allowance of £12,300 in 2023-24. You can make up to £12,300 in capital gains without paying CGT.
- Offset your losses against gains. If you make any losses on your crypto investments, you can offset these against your gains to reduce your overall tax liability.
- Use tax-efficient investment vehicles. There are several tax-efficient investment vehicles that you can use to hold your crypto, such as self-invested personal pensions (SIPPs) and enterprise investment schemes (EISs).
- Gift crypto to your spouse or civil partner. You can gift crypto to your spouse or civil partner tax-free. This can be an excellent way to reduce your CGT liability if your partner has not used their total capital gains allowance.
- Take advantage of the trading allowance: The tax exemption is up to £1,000 per tax year for individuals with trading income from self-employment, casual services, or hiring personal equipment. It is not an automatic allowance, so you must claim it on your Self Assessment tax return to benefit from it.
- Consider investing in a crypto tax calculator. A crypto tax calculator such as KoinX can help you calculate your tax liability accurately and efficiently. There are several different crypto tax calculators available, both free and paid.
How to Report Crypto Tax In The UK?
When paying taxes on your cryptocurrency earnings is time, you need to include them in your Self-assessment tax return. Here’s a quick overview:
- Report gains and losses from crypto investments on the SA100 form and include a summary on the Capital Gains Summary SA108.
- Report income earned from cryptocurrency in Box 17 of your Self-assessment tax return (SA100).
You can do all of this online using the Government Gateway service, or if you prefer, you can fill out paper forms and mail them in. Remember, if you’re sending in a paper tax return, it must be postmarked by October 31, 2023, to meet the deadline.
During the Spring Budget 2023, the former Chancellor announced changes to the Self Assessment tax return forms. In the new changes, investors will now need to separately report their cryptocurrency assets under the new rules.
Moreover, to accurately report your taxes, you can use KoinX, a crypto tax calculating software that helps you to calculate and report your crypto taxes in the UK accurately.
KoinX In Action
KoinX is a platform that helps you manage your crypto taxes with ease. Whether you are a trader, an investor, or a miner, it can help you track your transactions, calculate your tax liability, and generate reports for filing. Here are some features that make KoinX stand out:
- Accurate Preview: It lets you preview your tax summary before finalising your report. You can also compare your results with other platforms and verify the accuracy of your data.
- Reliable Tax Reports: It generates tax reports that comply with your country’s tax laws. You can download your reports in PDF or CSV formats and use them to file your taxes online or offline.
- Auto-Classification of Transactions: It automatically classifies your transactions based on the type of activity, such as trading, investing, mining, staking, airdrops, or gifts.
- CA Directory: It also connects you with certified accountants specialising in crypto taxes. You can browse the directory and find a CA who suits your needs and budget. You can also contact them through the platform and get professional advice on crypto taxation in the UK.
Hence, if you are searching for robust tax calculation software, KoinX is the perfect solution.
Conclusion
Cryptocurrency tax in the UK is not that complicated to understand. You need to keep accurate records of your crypto transactions, such as the date, type, and value of the crypto, so you can compute whether to pay income tax or CGT.
If you are unsure how to do that, you can always try KoinX, a crypto tax software that automates the process to save time and hassle. It auto-classifies the crypto transactions based on their nature so that you can have a reliable tax report. So, join KoinX today and make your crypto tax in the UK easier.
Frequently Asked Questions
Do I need to pay tax on cryptocurrency if I don't sell it?
No, you do not need to pay tax on cryptocurrency if you don’t sell it. However, you may be liable for CGT if you sell your cryptocurrency at a profit.
Do I have to pay tax if I lose money on cryptocurrency?
No, you do not have to pay tax if you lose money on cryptocurrency. However, you can claim a capital loss on your tax return, which can offset any future capital gains you make.
What is the difference between Capital Gains Tax (CGT) and Income Tax?
Capital Gains Tax (CGT) is a tax you pay on the profit you make when you sell an asset that has increased in value. Income Tax is a tax you pay on your income, including income from your job, investments, and rental properties.
What are the penalties for not paying cryptocurrency tax?
You may be liable for penalties and interest if you do not pay your cryptocurrency tax. The penalties for not paying cryptocurrency tax can be severe, with interest at 8% annually.
Do I have to pay tax if I exchange one cryptocurrency for another?
Yes, you must pay tax if you exchange one cryptocurrency for another. This is because HMRC considers swapping cryptocurrencies a disposal event for CGT purposes.
