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How is crypto taxed in the UK according to HMRC?

How is crypto taxed in the UK according to HMRC? That will be the topic of today’s article.

Nothing written here is formal tax advice, and the facts might have changed since this article was penned.

If you want to invest as an expat or high-net-worth individual, which is what i specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).

How is cryptocurrency used?

Cryptocurrency is now in the spotlight! The hype has taken the world by storm amid the COVID pandemic. From Elon Musk to Mike Tyson to Kanye West, several people around the world own some form of cryptocurrency.
 
If you are on this crypto train for profit, well, good move, but if you are under the impression that the profit you make from crypto assets is treated as something like a lottery, then you are wrong about it. To be precise, the profits you make from crypto assets are not taxed.
 
Cryptocurrency is such a type of currency, which exists in digital form. In order to protect transactions in cryptocurrency, encryption is being used. There is no central authority to issue or regulate cryptocurrencies. A decentralized system is being utilized to keep track of transactions and issue new units.
 
So, cryptocurrency is a digital payment system that does not cooperate with banks in verifying transactions. In other words this is a peer-to-peer system that allows anyone, anywhere, to send and receive payments. Cryptocurrency payments exist exclusively digitally in an online database describing specific transactions. They do not imply transactions with physical money that have circulation and the possibility of exchange in the real world. When you transfer your funds in cryptocurrency, transactions are recorded in a public ledger and after the bought cryptocurrency is being stored in digital wallets.
 
The term Cryptocurrency came into use due to the fact that encryption (cryptography) is used to verify transactions: advanced encryption is used to store and transfer cryptocurrency data between wallets and to public registries. The purpose of encryption is to provide reliability and security.
 
As you may know, the very first cryptocurrency was Bitcoin, which was created in 2009 and is the most famous and expensive coin. Cryptocurrency trading is interesting in terms of making a profit; as a result of speculative activities, price jumps for cryptocurrencies are periodically observed.

How is cryptocurrency processed?

Cryptocurrencies are processed in a distributed public ledger – blockchain, where records of all transactions are stored, updated by currency holders.

Cryptocurrency units (coins) are created during the mining process. This is a process in which the processing power of a computer is used to solve complex mathematical problems, resulting in the generation of coins. Users can also buy currency from brokers and then store and spend it using cryptographic wallets.

Cryptocurrency is not a material object, it is a key that allows you to move a record or unit of measure from one person to another without a trusted third party. Bitcoin has been around since 2009, but financially, cryptocurrencies and the application of blockchain technology are still in their infancy; their rapid development is expected in the future. In the future, cryptocurrencies can be used in trading transactions with stocks, bonds and other financial assets.

How to buy cryptocurrency?

The question may arise how to safely buy cryptocurrency. This usually happens in three stages.

The main step is to choose a platform to use. As a rule, one can choose between a traditional broker or a specialized cryptocurrency exchange:

  • Traditional brokers. These are online brokers offering the purchase and sale of cryptocurrencies, as well as other financial assets: stocks, bonds, ETFs. These platforms tend to offer lower trading fees but fewer crypto features.
  • Cryptocurrency exchanges. There are many cryptocurrency exchanges, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge fees based on the assets traded.

When you compare the platforms, it will be needed to look at the cryptocurrencies traded, fees, security features, storage and withdrawal options, and also don’t escape the educational resources. So after this general intro of cryptocurrency, we can pass to our main topic, which is the taxation of crypto in the UK, according to the HMRC (Her Majesty’s Revenue and Customs – a non-ministerial department of the UK Government).

Cryptoassets’ taxation in the UK according to HMRC

HM Revenue and Customs or HMRC is a non-ministerial department of the UK government responsible for collecting taxes, disbursing some forms of government support, administering other regulatory regimes, including the national minimum wage and issuing national insurance numbers. HMRC was formed from the merger of the Internal Revenue Service and HM Customs and Excise, which came into effect on April 18, 2005. The department’s logo is St. Edward’s Crown enclosed in a circle.

HMRC has published guidance for people who own cryptoassets (or cryptocurrency as they are also known), explaining what taxes they may have to pay and what records they must keep. HMRC has also published additional information for businesses and companies on the tax treatment of transactions with crypto assets. Tax policy may change as the industry develops.

Cryptocurrency tax filing guide

HMRC (HM Revenue and Customs) has published guidance on filing crypto taxes in the UK. HMRC grouped crypto assets into four main categories. They are,

  • Exchange tokens: designed to be used as a means of payment. The most famous token, bitcoin, is an example of an exchange token.
  • Utility Tokens: Utility tokens provide the holder with access to certain goods or services on the platform, usually using DLT.
  • Security Tokens: A token with certain rights or interests in a business, such as ownership, the redemption of a certain amount of money, or the right to share in future profits.
  • Stablecoins: crypto assets pegged to the value of fiat money or other assets.

When is cryptocurrency subject to capital gains tax?

Since cryptocurrency is classified as an asset in the UK, when you exchange, sell or spend it, this is treated as a disposal of an asset and is subject to capital gains tax.

Not all of your disposable assets will be subject to capital gains tax, and capital gains tax will only be payable on profits earned from their disposal. For example:

  • Profit from exchanging crypto for crypto
  • Profit from the sale of cryptocurrencies for fiat currency, for example, pounds sterling.
  • Using cryptocurrency to buy services and goods
  • Perceived profit from gifting cryptocurrency (excluding spouse)

How much capital gains tax will you pay?

Every UK resident has an annual tax-free capital gains allowance of £12,300 for the 2021/22 tax

Every UK resident has an annual tax-free capital gains allowance of £12,300 for the 2021/22 tax year. If your cryptocurrency profit is less than £12,300, you will not need to pay capital gains tax and you do not need to report it to HMRC.

The amount of capital gains tax you will pay will depend on the income tax group you fall into.

Capital GainsIncome Tax Band
10 %Basic rate Income Tax band (up to £50,270)
20 %Higher rate Income Tax band (up to £150,000)
20 %Additional rate Income Tax band (more than £150,000)

When is cryptocurrency taxed as income?

HMRC is very clear on when cryptocurrency is considered income and individual investors will be required to pay income tax and National Insurance Contributions (NIC) in the following areas.

Receiving payment in bitcoins or altcoins

Any cryptocurrency received as income from work is considered to be of monetary value. Money value is when something has a direct monetary value to an employee or something that can be converted into money.

If you receive all or part of your salary/freelance income in cryptocurrency instead of fiat currency, you will have to pay income tax and network cards based on the value of the cryptocurrency at the date of receipt. Please, be careful; the rules differ depending on whether the crypto asset you receive is a readily convertible asset (RCA) or not. Disposal of crypto assets received as income from employment is subject to capital gains tax.

Mining

Cryptocurrency mining can be considered both a full-fledged business and a hobby. The classification depends on several factors:

  • Organization
  • Risk
  • Degree of activity
  • Commercial

Mining as a business

If your mining activity is classified as a business, then mining income will be added to trading profits and is subject to income tax deductibility.

When you dispose of this cryptocurrency, any gain in value from the time of purchase will be added to your trading profit and this transaction may be subject to NIC.

Mining as a hobby

If your mining activity is classified as a hobby, any income from mining must be reported on your tax return as “Other Income”. The income in this case will be the fair market value of the cryptocurrency at the time of its receipt. Fees or fees received in exchange for mining activities will also be added to your taxable income.

You may deduct reasonable expenses from this income before adding it to your taxable income. Keep in mind that when realizing this cryptocurrency, it will be subject to capital gains tax.

Staking

HMRC states that the value of any tokens awarded in GBP at the time of receipt will be taxed as income (other income) with any reasonable expense deducting the amount charged.

You can consider this as a savings income and claim your personal savings to further reduce any taxes due. We recommend talking to a tax accountant if you are considering this.

Keep in mind that capital gains tax rules may apply if you get rid of it at a later date.

Airdrops

Income tax will not apply to cryptocurrency sent over the air, provided that:

  • They are not accepted as part of trading or business related to cryptocurrencies
  • They are received without any action in return

If airdrops are provided in exchange for a service, they will be subject to income tax and classified as trading profits (if you are a business) or miscellaneous income.

If a cryptocurrency business or trader receives an airdrop, any increase in value will be added to trading profits and will be subject to income tax as well as network cards. If an individual receives an airdrop, they will be subject to capital gains tax at the time of the sale.

How much income tax will you pay?

The amount of income tax you will pay will depend on the income tax group you fall into. For the 2021/22 tax year, the following rates apply.

BandTaxable IncomeTax Rate
Personal allowanceUp to £12,5700 %
Basic rate£12,571 – £50,27020 %
Higher rate£50,271 – £150,00040 %
Additional rate£150,000 +45 %

Are any crypto transactions tax exempt in the UK?

Yes, some crypto transactions are not subject to UK capital gains tax or income tax. This includes:

  • HODLing crypto
  • Transfer of cryptocurrency between your wallets
  • Buying cryptocurrencies with fiat currency, such as pounds sterling.
  • Giving cryptocurrency to a spouse

HMRC Cryptocurrency nudge letters

HMRC has sent out nudge letters to holders of crypto assets such as BitCoin to remind taxpayers of their obligations to report income or gains through a self-assessment tax return. It also serves as a reminder to sign up for self-assessment and notify them that they have transactions to report.

No action is required if you received an offer email and bought cryptocurrencies in 2020/21 or earlier but did not sell any. However, if you sold crypto in 2020/21, you should check if it resulted in a taxable profit or loss and this will need to be shown on your self-assessment tax return for that year.

How does HMRC know that you own crypto assets?

HMRC has been looking for data on crypto exchanges for many years. Back in August 2019, it was reported that crypto exchanges doing business in the UK, such as eToro, Coinbase and CEX.IO, received letters from HRMC asking for customer data and transaction history.

HMRC confirmed to The Block that it has requested customer information from Coinbase UK along with other crypto platforms. “We want to help people do their tax business right and we believe that taxpayers want to do it right […]. HMRC regularly collects data from various sources of information using powers granted by Parliament. The data collected by HMRC is used to improve the integrity of the tax system and to identify those who have not declared their income.”

HMRC costing methods

HMRC has clear guidelines on methods for determining the value of a cryptocurrency, known as stock pooling. This prevents crypto investors from manipulating ACB’s cost-based method by selling their assets at a loss to reduce taxes and buying them back shortly thereafter.

There are three possible cost-based methods you can use and you need to work through them as they apply to your assets.

  • Same-Day Rule: If you buy and sell coins on the same day, you must use the basis of that day’s value to calculate your profit or loss. If you are selling more coins than you bought that day, move on to the next rule.
  • Bed and Breakfast Rule: If you buy coins/tokens and sell the same coins/tokens you purchased within 30 days, you will use the value of the coins/tokens purchased during that month to calculate your profit/loss. If you’re selling more than you’ve bought this month, move on to the third rule.
  • Section 104 Rule: If the two rules above do not apply to your crypto transactions, you must use this cost-based method when calculating your crypto taxes. This works in the same way as the ACB method, where you calculate the average cost basis for a pool of assets by adding up the total amount paid for all assets and dividing it by the total amount of coins/tokens held.

Profit and loss reporting on your personal tax return

It is important that you report capital gains and losses on your tax return. Losses can be used in two ways. First, by offsetting any losses against any profits made in the same tax year, which reduces your potential tax bill. You can also use your losses to reduce your tax bill by carrying them forward and offsetting them with future profits.

When do you have to file your UK Cryptocurrency Tax Return?

If you bought or sold cryptocurrency between the UK tax year 6 April 2020 to 5 April 2021, you will need to file a self-assessment tax return by 31 January 2022.

You will need to keep detailed records for a year of all your crypto transactions and report any capital gains or losses, as well as any crypto income perceived as income, to HMRC.

After you file your tax return, HMRC will calculate whether you owe any tax. You will also need to pay all taxes by midnight on January 31, 2022, so it is recommended that you file your tax return as early as possible.

Important recommendations

Anyone in the UK who holds crypto assets as a personal investment will be taxed on any gains made from those assets. Claiming that you only have to pay capital gains tax on total gains in excess of the annual exempt amount.

Individuals must pay taxes on cryptocurrencies received from mining, airdrops, confirmation fees, and cryptocurrencies received as wages from an employer. Crypto assets donated to charity are not subject to capital gains tax, as long as the donation does not exceed the acquisition cost.

According to HMRC, capital losses from cryptocurrencies can be taxed. If you sell cryptocurrencies at a loss, then the loss can be deducted to reduce your overall capital gain. In addition, exchanging cryptocurrency for fiat or cryptocurrency for another cryptocurrency is a taxable event. In general, keep in mind the fact that your crypto portfolio, just like your stock portfolio, if you make a profit, it will be taxed.

For those who invest through Binance

Do you have to pay taxes when buying or selling cryptocurrency? There is no concrete answer to this question. Your taxes will depend on your location, how long you hold your cryptocurrency, the type of activity you do, and other factors. As a general rule, you will probably have to pay taxes or recover losses on a sale, but not on a purchase. Taxation in cryptocurrencies is not always easy. As a fairly new asset, the tax authorities are still developing cryptocurrency regulations. However, you are responsible for keeping track of your taxable profits and losses and paying the correct amount of tax in accordance with your country’s legal and regulatory framework.

What is a taxable event?

A taxable event is a transaction or activity on which you are required to pay taxes. These events are not universal. A taxable event in one country may not be taxable in another. As a rule, all transactions related to the sale of goods, investments and other capital assets are taxed. Buying digital currencies like Bitcoin or BNB with fiat currency is unlikely to be taxed. However, the sale or exchange of your cryptocurrency will most likely be taxed.

A taxable event will leave you with a capital gain (gain) or capital loss. If the asset you are holding increases in value and you trade it for a profit, you have made a capital gain. If you trade or sell this asset at a loss, you have incurred a capital loss.

Again, whether capital gains are a taxable event depends on your local tax authority. You can deduct capital gains losses to reduce taxes. The total amount of tax depends largely on their amount. To calculate this, taxpayers must enter the date, base value (purchase price), sale value, and fees associated with all trading transactions.

How is cryptocurrency taxed?

The official classification of bitcoins and other cryptocurrencies in the country will determine how they will be taxed. Tax authorities generally consider cryptocurrencies to be a capital asset rather than a currency. Unless your country has specific cryptocurrency tax laws, expect your cryptocurrency profits to be taxed according to their official designation (if any).

Some jurisdictions take a much simpler approach. In Germany, for example, there has been no tax on cryptocurrencies for more than a year. Malaysia, Portugal and Singapore also have very liberal taxation rules for cryptocurrencies.

Your income in bitcoins or cryptocurrencies may also be treated as income tax. If you are a full-time employee, freelancer, or crypto trader who is paid in crypto, you are likely liable to pay income tax on your crypto earnings. Once you reach a certain income threshold, you may not pay tax on your income. Typically, you will find different income groups, with higher income groups paying higher tax rates. If your main income comes from trading, find out if you are subject to capital gains tax or income tax.

How do the tax authorities find out about my cryptocurrency?

Tax authorities such as the IRS, ATO, CRA, HMRC, and others monitor cryptocurrency transactions and enforce tax laws. Major cryptocurrency exchanges are also cooperating with the authorities.

Governments use data analysis tools such as Chainanalysis to pinpoint cryptocurrency users. With enough information, they can link blockchain transactions from regulated cryptocurrency exchanges to their personal crypto wallets. These analytics even include several layers removed from exchanges to combat tax evasion. The IRS and other tax authorities also cooperate and share data with other government agencies, academic institutions, and international governments to share information about the use of cryptocurrencies.

What happens if you don’t file a cryptocurrency tax return?

In many countries, the tax authorities require you to file your tax returns on a regular basis. This may be the case even if you do not owe taxes or need a refund. Failure to file can result in fines, fines, interest, refund forfeiture, audits, and even jail time.

Binance API Tax Reporting Tool

The Binance Tax Reporting Tool allows you to track your cryptocurrency activities. You can create a report through the API and use it to make sure you meet the requirements of your jurisdiction.

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Adam is an internationally recognised author on financial matters, with over 748.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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