Cryptocurrency has become a buzzword in recent years, even in the UK. As the popularity of cryptocurrencies soars, so does the importance of understanding how tax regulations apply. The HMRC (His Majesty Revenue and Customs) has set out clear tax rules for cryptocurrencies, which can be complex and challenging to understand.
Moreover, the HMRC has also brought into action some significant changes in the crypto tax laws, such as the annual capital gains tax (CGT) allowance reduction from £12,300 to £6,000 for the financial year (FY) 2023-24 and £3,000 for FY 2024-25, i.e., you can only make £6,000 of capital gains in the year 2023, and £3,000 in the year 2024 without paying any tax.
Therefore, investors and traders new to crypto can get tangled with the tax laws and might end up paying more tax without strategic tax planning.
But if you want to learn how to not pay tax on cryptocurrency in the UK? Then, you are on the right page. Although there are specific methods to decrease the tax liability on your crypto transactions, you must be very careful about the following legal compliances.
Taking Advantage Of Tax-Free Thresholds
One of the best answers on ‘how to avoid paying tax on cryptocurrency in the UK’ is to use the tax-free threshold set by HMRC. In comparison to other nations, HMRC offers relatively generous tax-free thresholds.
The current annual exempt amount (AEA) for CGT in crypto is £12,300 for the 2022-2023 tax year. That is, you can sell or exchange your crypto assets up to this amount without paying any tax on your profits.
However, in April 2023, the HMRC reduced the AEA for CGT from £12,300 to £6,000 for FY 2023/24 and £3,000 for FY 2024-25. Therefore, you will have less CGT-free allowance each year.
It is important to note that apart from the CGT allowance, you can also benefit from the standard personal allowance of £12,570, which remains untaxed income in the UK. But there is a catch: if you earn more than £100,000 in a financial year, your personal tax allowance will be reduced. Moreover, earning over £125,140 makes you ineligible to receive the CGT allowance.
Harvesting Losses To Offset Gains
Another way to legally avoid tax in the UK is by harvesting your losses to offset capital gains. To make it simpler for you, let’s start by understanding the difference between unrealised losses and capital losses.
An unrealised loss occurs when the market value of your crypto asset drops below your purchase price, but you have not sold it. On the other hand, a capital loss occurs when you sell, donate, spend, trade or gift a crypto asset for less than what you paid.
Let’s assume you are facing an enormous tax payment but have some unrealised losses on your crypto portfolio. You can dispose of these cryptos at a loss and use these losses to offset your capital gains. This technique is called tax loss harvesting.
However, you need to be aware of the wash sales rule. The wash sale rule prevents you from claiming a capital loss if you buy back the same or substantially similar crypto asset within a shorter time period of disposal. It is not allowed by the HMRC, and any capital losses incurred in such a fashion will not be allowed.
Such unrealised losses can be tracked using crypto portfolio trackers such as KoinX. It offers a platform where you can accurately preview all your transactions from different exchanges and wallets under a single window.
Utilising Trading And Property Tax Break
The third method to avoid tax on cryptocurrency in the UK is by utilising trading and property tax breaks. These two separate allowances allow you to earn up to £1,000 each from trading and property income without paying any tax.
Trading income includes profits from buying and selling crypto assets and other trading activities such as forex, stocks, or commodities. Property income consists of any rental income from letting out a property or a part of it and any gains from selling a property that is not your primary residence.
If you invest in trading and property, you can combine the two allowances and earn up to £2,000 tax-free. However, you cannot use one allowance to cover the excess of the other. For example, suppose you earn £1,500 from trading and £500 from the property. In that case, you can only use £1,000 of the trading allowance and £500 of the property allowance, not £1,500 of the trading allowance and £0 of the property allowance.
Trading and property tax breaks are straightforward methods to reduce cryptocurrency tax liability, particularly if you have relatively small investments.
Investing Crypto Into A Pension Fund
One of the ways to pay less tax on crypto in the UK is to invest in a pension fund, such as a Self-Invested Personal Pension (SIPP) or an Individual Savings Account (ISA). These retirement accounts allow you to invest in various assets, including some cryptocurrencies, and enjoy tax benefits.
A SIPP is a personal pension scheme that lets you choose and manage your investments. You can contribute up to £40,000 per year (or 100% of your earnings, whichever is lower) and get tax relief on your contributions.
The tax relief rate depends on your income tax band and can be up to 45%. You can transfer existing crypto assets into your SIPP but may have to pay CGT. You can access your SIPP funds from age 55 and withdraw 25% tax-free. The rest is subject to income tax.
Alternatively, an ISA is a savings account that lets you invest in cash, stocks and shares, or some cryptocurrencies without paying any tax on interest, dividends, or capital gains. You can contribute up to £20,000 annually and withdraw your money anytime. However, not all crypto platforms are ISA-compatible, and you may have to use a third-party service to invest in crypto through an ISA.
SIPP and ISA offer potential tax advantages for crypto investors but also have drawbacks and risks. For example, you may have to pay fees to open and maintain these accounts and face penalties for early withdrawals or transfers. Moreover, investing in crypto is highly volatile and speculative, and you may lose some or all of your money. Therefore, consulting a financial advisor before investing crypto in a pension fund is advisable.
Making Crypto Donations
Did you know you can legally avoid crypto tax in the UK by donating crypto assets to charity? According to HMRC, crypto donations are tax deductible in the UK if the donation is not greater than the cost of acquiring the crypto. You can reduce your taxable capital gains by the value of your donation and support a good cause.
For example, if you bought 1 BTC for £10,000 and it is now worth £40,000, you would have to pay CGT on the £30,000 gain if you disposed of it. However, if you donated that 1 BTC to a registered charity, you would not have to pay any tax on it, and you would also reduce your taxable income by £40,000.
However, to qualify for tax-deductible donations, you must ensure that the charity is registered with HMRC or the Charity Commission. You must also keep records of your donations, such as receipts or confirmation emails from the charity.
Gifting Crypto To A Partner
According to the HMRC, transfers of assets such as cryptocurrencies between spouses or civil partners living together are exempt from CGT as long as they are not separated or divorced.
Such crypto transfers do not trigger any taxable event, as the disposal is deemed to occur at ‘no gain, no loss’. That is, the amount you receive from the crypto transfer equals the amount you paid for acquiring the crypto assets plus any associated costs.
Gifting crypto essentially increases the CGT allowance for civil partners and married couples to £24,600, doubling the previous limit until April 2023. Moreover, even if your CGT liability exceeds the allowance, transferring cryptocurrency to your partner in a lower-income tax bracket can still be advantageous. This is because they may fall into a lower CGT bracket, potentially reducing the overall tax burden on the disposal.
Investing In EIS Or SITR
If you want to avoid crypto tax in the UK legally, consider investing in EIS or SITR. These government schemes offer tax relief for investing in social enterprises and early-stage businesses.
One of the benefits of these schemes is that they allow you to defer paying CGT on any gains you make from selling your crypto assets as long as you reinvest the proceeds within a specific time frame. You can postpone paying tax until you sell your EIS or SITR shares or until the scheme ends.
Another benefit is that if you hold your EIS or SITR shares for at least three years, you can enjoy CGT exemption on any gains from them. You can avoid paying tax on the growth of your investment and the deferred gains from your crypto assets.
Using A Crypto Tax Calculator
Identifying all potential cryptocurrency tax-saving opportunities can be challenging, especially if you’re not fully aware of the current state of your portfolio. Using a crypto tax calculator such as KoinX can be of great help.
KoinX’s UK tax calculator helps you calculate your capital gains and losses from your crypto trades and your income tax from mining, staking, lending, or receiving crypto as payment. It also helps you track your cost basis, the amount you paid for each crypto asset, your disposal proceeds, and the amount you received when you sold or exchanged it.
The platform supports integrations of over 180 exchanges and wallets, which can help automatically import your transaction history from them once you link it. It classifies transactions based on their nature and thereby generates reliable tax reports. Hence, KoinX can help you to pay less taxes if used strategically.
Conclusion
The UK crypto tax landscape is constantly evolving, and you need to stay on top of the latest rules and regulations. To save crypto tax in the UK, you should act before the tax law changes and make the most of your crypto assets.
Don’t miss the chance to optimise your crypto tax situation and maximise your profits. To do so, using a tax calculator like KoinX can be profitable. So why wait? Join KoinX today and avoid crypto tax legally in the UK.
Frequently Asked Questions
Can I Hide My Crypto Transactions From HMRC?
No, you cannot hide your crypto transactions from HMRC. Cryptocurrency transactions may be pseudo-anonymous, but HMRC actively uses its legal authority to collect data from major exchanges operating in the UK. This includes personal details like your name, address, and transaction history. In 2024, over 8,000 investors received ‘nudge letters’ from HMRC regarding unpaid crypto taxes, emphasising that hiding such transactions is not a feasible option.
Is Holding Crypto Taxable In The UK?
No, merely holding cryptocurrency in the UK is not taxable. However, taxes are triggered when you sell, trade, or use your crypto for goods or services. Profits from these activities may be subject to Capital Gains Tax (CGT), while income from staking or mining could fall under Income Tax. Always consult tax guidance to understand when your crypto holdings become taxable.
Do Crypto Exchanges In The UK Report To HMRC?
Yes, crypto exchanges in the UK report to HMRC. These exchanges are legally required to share customer data, including transaction histories and the value of crypto holdings. HMRC uses this information to ensure accurate reporting and taxation of crypto-related income. Investors need to declare their crypto activities honestly to avoid penalties for non-compliance.
What Is The Last Date To File Crypto Taxes In The UK For FY 2024-25?
The deadline to file your crypto taxes for the financial year 2023-24 is 31st January 2025. The tax year you’ll be reporting on runs from 6th April 2023 to 5th April 2024. Ensure you include all crypto transactions in your Self Assessment Tax Return by this date to avoid penalties for late filing.
