Cryptocurrency has transformed the way people think about money and investment. With the rise of digital currencies like Bitcoin, Ethereum, and others, more individuals and businesses are stepping into the crypto space. However, with these opportunities come tax obligations. In the UK, cryptocurrency is treated as an asset, and understanding how it’s taxed is crucial for anyone involved in crypto trading, investment, or earning it as income.
What Is Cryptocurrency?
Cryptocurrency is a digital or virtual form of currency that uses cryptography for security, with Bitcoin and Ethereum being the most well-known examples. These currencies operate on blockchain technology, making them decentralized and secure. Cryptocurrencies are often viewed as a store of value or traded for profit due to their volatility. However, despite their rise in popularity, cryptocurrencies are subject to taxation in the UK.
Tax on Crypto in the UK
In the UK, cryptocurrencies are considered assets, not legal tender, and are therefore taxable. The two primary taxes that apply to crypto are capital gains tax (CGT) and income tax. The specific tax depends on the nature of your crypto activities, whether you’re trading, mining, staking, or using crypto for payments.
When Are You Liable to Pay Tax on Crypto?
You will need to pay tax when you “dispose” of your crypto. Disposing of crypto includes actions such as:
- Selling crypto for cash
- Exchanging one crypto for another
- Using crypto to purchase goods or services
- Gifting crypto (except to a spouse or civil partner)
HMRC treats these activities as taxable events. If you make a profit from any of these transactions, you will be subject to capital gains tax. However, if you earn crypto through mining, staking, or as payment for services, you will pay income tax.
Common Taxable Events for Crypto
Understanding what constitutes a taxable event is important. Here are the scenarios that can trigger a tax obligation:
- Selling Crypto for Cash: If you sell crypto for fiat currency like GBP and make a profit, it’s subject to CGT. The taxable gain is the difference between what you paid for the crypto and what you sold it for.
- Trading Cryptocurrencies: Exchanging one cryptocurrency for another is also considered a taxable event. Any profits from these trades are subject to CGT.
- Using Crypto for Purchases: When you use crypto to buy goods or services, the value of the purchase is used to calculate any taxable gain.
- Earning Crypto from Mining, Staking, or Airdrops: Crypto earned through mining, staking, or airdrops is taxed as income at the time of receipt.
- Derivative Trading: Trading crypto derivatives such as options and futures is subject to CGT, and any profits or losses must be reported.
How Capital Gains Tax (CGT) Applies to Crypto Profits
Capital gains tax applies to profits made from the sale or exchange of crypto assets. The calculation is straightforward: the difference between the acquisition cost (how much you paid for the crypto, including transaction fees) and the disposal value (what you sold it for).
With the new rates introduced in 2024/2025, the CGT on crypto profits is calculated as follows:
- 18% on taxable profits between £12,570 and £50,270
- 24% on taxable profits over £50,270
You can reduce your taxable gain by using the annual CGT allowance, which is £3,000 for 2024/2025. If your profit from crypto sales exceeds the allowance, it will be taxed according to the new rates.
Tax-Free Allowances and Exemptions
Some crypto transactions are exempt from tax in the UK. These include:
- Purchasing crypto with fiat currency
- Holding crypto (HODLing)
- Gifting crypto to a spouse or civil partner
- Donating crypto to charity
- Transferring crypto between your own wallets
Additionally, there are allowances that provide tax relief:
- Nil-Rate Band for CGT: The first £3,000 of your capital gains is tax-free.
- Annual Trading Allowance: A £1,000 allowance for miscellaneous income, including crypto trading, can be used if your trading income is under this threshold.
Deductible Expenses for Crypto Activities
When calculating your tax obligations, you can deduct certain expenses related to crypto activities, including:
- Mining Hardware: If you mine crypto, you can deduct the cost of your mining equipment, as long as they haven’t already been accounted for under other income tax claims.
- Transaction Fees: Fees associated with buying, selling, or trading crypto are deductible.
- Costs for Acquiring Crypto: Any costs incurred in acquiring or disposing of crypto can be deducted.
Income Tax on Cryptocurrency Activities
If you earn crypto through activities like mining or staking, the value of the cryptocurrency is subject to income tax. The income is taxed according to the same income tax bands as regular salary income.
For instance:
- Income over £12,570 is taxed at 20%.
- Higher income will be taxed at 40% or 45%, depending on the total amount.
Some other taxable situations include:
- Mining: Rewards earned from mining crypto.
- Staking: Earnings from staking your crypto assets.
- Airdrops: Tokens received as part of a promotion or network update.
Reporting Your Crypto Taxes in the UK
If you’re self-employed or an investor, you’ll need to report your crypto earnings through the Self-Assessment tax return. This includes reporting capital gains and income tax from crypto transactions. You can register for Self-Assessment through the Government Gateway.
Be mindful of the deadlines:
- 31st January: The deadline for filing your Self-Assessment Tax Return and paying any tax owed.
It’s essential to keep thorough records of all your crypto transactions, including dates, amounts, and transaction fees. This will help you calculate your profits and ensure you’re paying the correct tax.
Common Mistakes to Avoid
Many crypto investors and traders make mistakes that can lead to tax issues. Here are a few common errors to avoid:
- Not Reporting Crypto Transactions: Many people think that crypto transactions are anonymous and untraceable. In reality, HMRC has access to information from exchanges and can track your transactions. Failing to report all transactions, including losses, can lead to penalties.
- Incorrect Record-Keeping: Proper record-keeping is essential. Failing to document transaction dates, acquisition costs, and disposal values can result in incorrect tax calculations and higher liabilities.
- Misunderstanding Taxable Events: Some investors fail to realize that exchanging one cryptocurrency for another or using crypto for purchases are taxable events. Make sure to report all relevant transactions.
Final Thoughts
Cryptocurrency tax in the UK can seem complex, but with the right understanding, it becomes much easier to manage. Keep track of your transactions, report accurately, and make sure you are compliant with the latest tax rules. If you are unsure about how to handle your crypto taxes, it’s always a good idea to seek professional advice to ensure you’re getting it right.
