The UK tax laws consider cryptos as assets. So, any crypto transaction attracts income tax or capital gain in the UK. Income tax is charged on profits from mining cryptocurrency or receiving cryptocurrency as payment for goods or services. The income tax you pay will depend on your income tax band and the profit you make.
On the other hand, capital gains tax (CGT) is charged on selling, exchanging, or trading cryptocurrency. The amount of CGT you pay will depend on the amount of gains made.
In this article, we’ll delve into how Income Tax is levied on your crypto income in the UK.
Crypto Income And Personal Tax
HMRC, or His Majesty’s Revenue and Customs, a government body responsible for tax management in the UK, does not consider crypto as real money or currency but rather as property.. Thus, according to HMRC, any profits or earnings made on the purchase or sale of your cryptocurrency assets during crypto trading are considered income and taxable under Income Tax.
Now, transactions made during crypto trading are categorised as income and are taxable under your regular Income Tax band. Moreover, in some cases, you may also be required to pay a National Insurance contribution to the state. The type of crypto transactions liable for income tax in the UK has been explained in the section below.
Crypto Transactions That Attracts Income Tax In The UK
Understanding the tax implications of crypto transactions is crucial for UK investors. Various transactions involving cryptocurrencies can trigger income tax liabilities. Let’s explore these in detail.
Crypto Received as Salary or Income
If you receive cryptocurrency as payment for goods or services, HMRC considers this income. This payment is classified as “money’s worth,” meaning it carries a monetary value. Consequently, you must pay income tax and National Insurance contributions on the equivalent value of the cryptocurrency when you receive it. It’s essential to keep records of the value at the time of receipt to report and pay the necessary taxes accurately.
Staking Rewards
Staking has become a popular way for crypto investors to earn passive income. According to HMRC, if you stake cryptocurrencies as a regular activity, your rewards are classified as income. This classification means you’ll incur income tax on these rewards, calculated after deducting appropriate expenses. Suppose you receive staking rewards without engaging in regular staking activities. In that case, the HMRC will treat the pound sterling value at the time of receipt as miscellaneous income, which is also subject to income tax bands.
Income from Mining
Crypto mining remains a viable avenue for generating income. The tokens you earn through mining activities fall under the same guidelines as other forms of income. HMRC states that the value of these tokens incurs income tax, and you can deduct related expenses before calculating your tax obligation. Keeping detailed records of your mining activity and associated costs is vital for accurate tax reporting.
Income from Airdrops
Airdrops, which involve receiving tokens for free, can also trigger income tax. If you receive airdropped tokens in exchange for services or products, HMRC classifies this as income. Thus, you must report it as either existing trade income or miscellaneous income. However, there are exceptions. If you receive airdrops without providing any service or product or if they are not linked to trading activities on crypto exchanges, you do not need to pay tax on them.
DeFi Transactions That Attracts Income Tax In The UK
HMRC will likely consider any “returns” via DeFi activities, including receiving new coins or tokens, as additional income. So, you must pay income tax based on the token’s or asset’s fair market value. The DeFi activities likely to be considered as income include:
- Interest from Lending Crypto: When you lend your cryptocurrency, any interest received typically counts as income. The nature of this payment affects the tax classification.
- Yield Farming Rewards: Engaging in yield farming allows you to earn rewards, but these can also be viewed as taxable income. Again, the mode of payment will dictate how HMRC treats these earnings.
- Liquidity Pool Tokens: If you earn liquidity pool tokens as interest for lending, HMRC considers these tokens as income. The payment method for these rewards plays a significant role in determining their tax status.
Engage To Earn Crypto
Engaging in the crypto ecosystem can yield exciting financial opportunities through various platforms designed for earning. These platforms have become increasingly popular, especially in the decentralised finance (DeFi) space, where users can actively participate and earn rewards. While HMRC has yet to provide specific guidance on engage-to-earn or play-to-earn platforms, we can draw some conclusions based on existing income classifications.
Understanding Income from Crypto Engagement
Earnings generated from staking and mining are already classified as income by HMRC. Therefore, it’s reasonable to assume that other engagement-based earnings, such as those from engage-to-earn platforms, will also fall under this classification. This means that any tokens or coins earned from these activities will likely attract income tax.
Examples of Engage-to-Earn Opportunities
Here are some examples of how you can earn crypto through engagement:
- Referral Rewards: Many platforms, like Binance, offer incentives for referring new users. You can earn a percentage of trading fees from your referrals, translating into crypto income.
- Learn to Earn Campaigns: Platforms like Coinbase Learning Centre and CoinMarketCap Learning Centre reward users for completing educational modules. These campaigns encourage learning while earning crypto rewards.
- Watch to Earn: Platforms such as Odysee enable users to earn tokens by watching videos. This interaction creates a simple yet effective way to accumulate crypto.
- Browse to Earn: Using browser extensions like Brave can earn you tokens while you browse the web. This initiative incentivises users to engage with ads, rewarding them in the process.
- Play to Earn Games: Games like Axie Infinity allow players to earn tokens by participating in gameplay. These platforms blend entertainment and earning potential.
- Shop to Earn: Browser extensions like Lolli provide rewards when you shop online. By using these extensions, you can earn crypto back on your purchases.
The most prominent factor that indicates whether the DeFi transaction is classified for income tax or capital gain tax is the ‘nature of income’ for DeFi transactions, i.e., whether crypto is being ‘earned’ or ‘disposed of’.
In the case of earning, you’re obligated to pay Income Tax, whereas in the case of disposal, you’re compelled to pay Capital gains tax.
Applicable Personal Tax Rates
The tax on your crypto income is calculated according to its associated tax rates. You need to learn about the corresponding tax rates to understand the dynamics of calculating your crypto income tax.
As per the HMRC tax laws in the UK, you only have to pay taxes on the amount you earn. The tax rates on your income are divided based on income tax bands. The income tax banding is progressive. This means you don’t have to pay the same income tax rate on all your earnings; instead, you’ll pay a higher tax rate solely if your income comes under higher tax bands.
Notable Income Tax Rates And Thresholds:
The following table displays the UK’s Tax Banding System
Note: The £12,570 personal allowance is not available to taxpayers making more than £125,000 a year, and it is lowered for those making more than £100,000.
How To Calculate Income Tax On Crypto In The UK
Calculating your crypto income is essential for accurate tax reporting and financial tracking. To start, determine the fair market value of the coins or tokens you received on the day you acquired them. This process is relatively straightforward for occasional earnings but becomes more complex for regular income streams from activities like mining or staking.
Taxable income = FMV(fair market value) of the tokens earned
(The earnings could be through – salary, mining, interest, etc.)
For instance, if you mine cryptocurrency regularly, you will need to assess the value of the coins daily. Gathering this information for an entire year can feel overwhelming, especially if you have numerous transactions. However, using tools like KoinX can significantly simplify this task. KoinX automates the calculation of your crypto income, saving you time and ensuring accuracy.
Real-Life Scenario
Jimmy’s annual income is £40,000. He was paid £10,000 worth of Bitcoin for a project. His total income now is £50,000. His tax liability will be calculated as under.
1st £12,570 – NIL – Personal Tax allowance
Since he falls under the basic rate tax bracket, tax liability on the earnings of £10,000 worth of Bitcoin will be taxable @ 20%.
Therefore,
Tax liability = £2,000.
Conclusion
Overall, if you’re earning through cryptocurrency in the UK, you must pay the taxes levied on it according to HMRC guidelines. A proper understanding of these guidelines is important to comply with the tax laws of the UK and calculate your income tax accurately. But then, manual computation of these taxes can take away a lot of your valuable time and effort.
KoinX is an easy-to-use platform that helps you calculate your crypto taxes in the UK by reducing any complications on your part and simplifying the tax calculation process. Additionally, you can monitor your crypto tax portfolio in a single place. For example, if you have accounts on four different crypto exchanges, you can monitor all of them in a single place in KoinX. This will, in turn, help you to make an informed decision.
Frequently Asked Questions
Does Crypto Day Trading Attract Income Tax In The UK?
No, crypto day trading does not attract income tax in the UK. However, any profits made from day trading may be subject to Capital Gains Tax. It’s essential to keep accurate records of all transactions to calculate gains or losses correctly and ensure compliance with HMRC regulations.
Can HMRC Track My Crypto Transactions?
Yes, HMRC can track your crypto transactions and other digital assets. The agency has established a data-sharing program with major centralised exchanges to promote tax compliance. This means that if you trade or transact in cryptocurrencies, HMRC can access your data to ensure you’re meeting your tax obligations.
Does Binance Report To HMRC?
While HMRC seldom reveals which exchanges it has compelled to share customer data, Binance, being one of the largest crypto exchanges globally, most likely complies with HMRC. Binance adheres to regulatory standards worldwide, making it probable that it shares customer data with HMRC, ensuring compliance with UK tax laws.
Do I Need To Report Crypto That I Am Not Selling?
No, you don’t need to report the cryptocurrency that you hold, as it is considered tax-free by HMRC. However, if you earn crypto through activities like mining or staking, those earnings must be reported, as they are subject to personal tax in the UK.
