Crypto Taxes UK: The Ultimate Guide 2024 [HMRC Rules]

The world of cryptocurrencies is ever-evolving, and with it comes the need for clarity on taxation. As the UK government and HMRC adapt to the digital currency landscape, understanding your tax obligations is crucial. This guide provides an in-depth look at crypto taxation in the UK for 2023.

Watch and Learn: Navigating Crypto Taxes in the UK

Embarking on your journey through the complexities of cryptocurrency taxation in the UK? Start with this essential video guide. It breaks down the latest tax regulations, offering practical advice on everything from capital gains to income tax implications for your crypto investments. Ideal for both beginners and experienced investors, this video lays the groundwork for the comprehensive guide provided in this article.

Understanding Crypto Taxation in the UK

Cryptocurrencies have firmly established themselves in the financial landscape, and the UK’s HMRC has been proactive in setting guidelines for their taxation. Whether you’re trading, investing, or merely dabbling in the crypto space, it’s vital to be aware of your tax obligations.

Taxable Events on Cryptocurrencies

A taxable event in the realm of cryptocurrencies refers to a specific action or transaction that triggers a tax obligation. Key taxable events include:

• Selling crypto for fiat currency.
• Trading one cryptocurrency for another.
• Spending crypto on goods or services.
• Gifting cryptocurrency (except to your spouse).
• Mining and receiving crypto through airdrops.
• Participating in hard forks.
• “Burning” digital assets

Cost Basis and Valuation

Understanding the cost basis is crucial for determining the taxable amount. In the UK, specific cost basis methods for crypto include:

• Same-Day Rule: If you purchase and sell the same cryptocurrency within the same day, the cost basis used for calculating gains or losses is determined by the value of the assets on that particular day. If you have conducted numerous purchases at varying prices on the same day, the cost basis is determined by calculating the average acquisition cost.
• Bed and Breakfasting Rule: If you sell tokens and buy them back within 30 days, the cost basis for Capital Gains Tax will be the cost of acquiring the tokens within that 30-day window.
• Section 104 Rule: If neither of the above rules applies, then the average cost of all the tokens you own is used.

It’s also worth noting that transferring crypto between personal wallets or exchanges is tax-free. However, the associated transfer fees might complicate the tax situation.

Crypto Tax Rates and Allowances

As the cryptocurrency market matures, the UK’s HMRC has established clear guidelines on tax rates and allowances for crypto transactions. Whether you’re a seasoned trader or a casual investor, understanding these rates and allowances can help you navigate the complex world of crypto taxation.

Crypto Capital Gains Tax UK

Capital Gains Tax (CGT) is levied on the profit made from selling an asset that has increased in value. In the context of cryptocurrencies:

• Profits from disposing crypto are subject to CGT.
• You will be required to pay Capital Gains Tax on the portion that exceeds the tax-free allowance.
• The specific rate of CGT you’ll pay depends on the total amount of your capital gains. The tax rate is either 10% (basic rate taxpayer) or 20% (higher rate taxpayer).
• You are a basic rate taxpayer if you earn up to £50,270. If you earn more than this amount you are considered a higher rate taxpayer. Here is an example:

If your gains push you over the basic rate threshold then the gains in excess of this will be taxed at the higher rate. For example, if you earn £40,270 through your job and make a £20,000 taxable gain then the first £10,000 (up to £50,270) will be taxed at 10%, with the remaining £10,000 taxed at 20%.

Crypto Income Tax UK

• If your crypto activities are more in line with trading or receiving income rather than investing, HMRC might consider your gains as income, subjecting them to Income Tax instead.
• Rewards from mining or DeFi activities as well as receiving airdrops are subject to income tax.
• Derivative trading of crypto assets are generally taxed as income.
• The income tax rates are as follows:

Current UK income tax rates for 2024/25 (source gov.uk). However, Income tax bands are different if you live in Scotland (https://www.gov.uk/scottish-income-tax).

Short-Term and Long-Term Capital Gains

The duration you hold a cryptocurrency doesn’t influence the tax you owe:

• Short-Term Capital Gains: These are gains on assets held for a short period, typically less than a year. In the UK, there isn’t a separate tax rate for short-term gains; they are taxed at the same rate as long-term gains. However, frequent trading can lead HMRC to classify your activities as trading, which might subject your gains to Income Tax.
• Long-Term Capital Gains: These are gains on assets held for more than a year. While the holding duration doesn’t change the CGT rate in the UK, it can provide benefits like reducing the likelihood of your activities being classified as trading.

Annual Tax-Free Allowance

Every individual in the UK has an annual tax-free allowance for capital gains:

• For the tax year 2022/2023, the tax-free allowance was £12,300.
• For the tax year 2023/2024, the government announced a reduction in the Capital Gains Tax allowance to £6,000.
• For the tax year 2024/2025, the tax-free allowance is £3,000.

Annual tax-free allowance. (Source: gov.uk)

Calculating Crypto Gains and Losses

One of the most crucial aspects of crypto taxation is calculating gains and losses. This section will guide you through the process and provide clarity on the methods used.

The basic formula to calculate gains or losses from a crypto transaction is:

Gain/Loss = Selling Price – Acquisition Cost

• Selling Price: The amount you receive when you sell your cryptocurrency.
• Acquisition Cost: The amount you initially paid to acquire the cryptocurrency, including any associated fees.

Comparative Example

Scenario A:

You bought 1 Bitcoin for £5,000 in January and sold it in June for £8,000.

Gain = £8,000 (Selling Price) – £5,000 (Acquisition Cost) = £3,000

Scenario B:

You bought 1 Bitcoin for £9,000 in July and sold it in December for £7,000.

Loss = £7,000 (Selling Price) – £9,000 (Acquisition Cost) = -£2,000

In Scenario A, you have a gain of £3,000, while in Scenario B, you have a loss of £2,000.

Reporting Cryptocurrencies on Tax Returns

In the UK, HMRC has provided guidelines on how individuals should report their crypto transactions on tax returns. Any cryptocurrency investor who has earned over £1,000 in crypto income or realized more than £6,000 (2023/2024) or £3,000 (2024/2025) in crypto capital gains is required to file a Self Assessment Tax Return with HMRC.

How to Report Crypto Taxes to HMRC

1. Self Assessment Tax Return: If you’ve made gains or incurred losses from your crypto transactions, you’ll need to report them using the Self Assessment tax return. We recommend doing this online through the Government Gateway service.
2. Capital gains and losses: Include details of your crypto transactions using the supplementary form SA108.
3. Crypto income: If you’ve received income from crypto, such as from mining or staking, report it in the supplementary pages using form SA100.
4. Record Keeping: Ensure you maintain detailed records of all your crypto transactions. This includes dates, amounts, the type of cryptocurrency, the purpose of the transaction and wallet addresses. HMRC can request these records, so it’s essential to keep them for at least five years after the submission date of the tax return.

When Do You Need to Report Your Crypto Taxes?

1. Annual Reporting: You should report your crypto transactions annually, in line with the UK’s tax year, which runs from 6th April to 5th April the following year. Regarding online tax returns, the deadline is the 31st of January following the conclusion of the tax year. Therefore, if the tax year concludes on the 5th of April 2023, online tax returns should be submitted by the 31st of January 2024.
2. Thresholds: If you make a taxable gain (over £6,000 for 2024 or £3,000 for 2025) then you must file a tax return and report it. However, if you already filed a tax return you must also report if your total proceeds exceed £50,000, even if you have no tax to pay.
3. Losses: If you’ve incurred losses, it’s beneficial to report them as they can be offset against other gains, potentially reducing your tax liability.

Taxation of Different Crypto Transactions

The diverse nature of cryptocurrency transactions means that each type can have its own tax implications. From trading and staking to airdrops and NFTs, understanding the tax treatment of each transaction type is crucial for compliance and optimal tax planning.

Crypto Trading Tax

• Profits from selling cryptocurrencies are subject to Capital Gains Tax.
• If you’re considered a frequent trader (e.g. day trading), HMRC might view your activities as trading, subjecting your gains to Income Tax instead.

Crypto to Crypto Trades

• Trading one cryptocurrency for another is a taxable event subject to capital gains tax. The gain or loss is calculated based on the market value of the crypto received.

Staking and Lending taxes

• Income from staking or lending crypto is subject to Income Tax.
• You will also be required to pay Capital Gains Tax when you later sell or dispose of the asset.

Mining taxes

• Received Cryptocurrencies from mining are taxed as income.
• The value of the mined crypto at the time of receipt determines the income amount.
• You will also be required to pay Capital Gains Tax when you later sell or dispose of the asset.

Airdrops taxes

• Airdrops will be taxable as income where you have provided any kind of service to receive them. They will not be subject to income tax where they are received without doing anything in return and where this is not part of a trade or business.
• The market value of the received crypto at the time of the airdrop will be the basis for taxation.
• You will also be required to pay Capital Gains Tax when you later sell or dispose of the asset.

Hard Fork taxes

• Receiving Coins from hard forks is not considered a taxable event.
• The cost basis for any coins obtained from a hard fork is determined based on your existing tokens from the previous blockchain. This is important when you later sell or dispose of your coins as this is subject to capital gains tax.

Crypto Payments taxes

• Spending crypto on goods or services is a taxable event subject to capital gains tax, with the gain or loss calculated based on the market value of the crypto at the time of the transaction.

Crypto Gifts tax

• Gifting cryptocurrency can trigger a capital gains tax event at market value for the giver, unless you gift it to your spouse or civil partner.

Taxes on Donations

• Donating crypto to a registered charity is tax-free. However, documentation is essential to claim this relief.

NFT Taxes (Non-Fungible Tokens)

• Minting NFTs doesn’t trigger a taxable event, but selling them does.
• When NFTs are sold, they are typically treated similarly to other cryptoassets and are subject to capital gains tax.
• However, it’s essential to recognize that the precise tax treatment of NFTs can differ based on their specific attributes, functionalities, and characteristics. Each case is assessed on an individual basis.

Transferring Crypto

• Transferring crypto between personal wallets or exchanges is generally not a taxable event. However, transfer fees could trigger a taxable event.
• Usually transfer fees are paid using cryptocurrency, and using crypto for spending constitutes a taxable event. This is considered as disposing of an asset, and any resulting profit is subject to Capital Gains Tax.

Liquidity Mining

• Transactions within the DeFi ecosystem, like liquidity mining, can have tax implications. Each transaction type within DeFi needs to be evaluated individually.
• The act of adding and removing liquidity is most likely subject to Capital Gains Tax.
• If you receive rewards you are likely to pay Income Tax.
• Disposing of your rewards is subject to capital gains tax.

Employment income

• Cryptocurrency obtained as employment income is treated similarly to receiving a salary. The employer is responsible for determining the value of the cryptocurrency in pounds at the time of receipt and should report this through the PAYE system with tax deducted at source by your employer.

Payment for Services

• Payment for providing services in the form of Cryptocurrency should be accounted for in the same way as if they had paid the equivolent value in cash and should be included in your accounts and tax return.

Strategies to Minimize Crypto Tax Liability

While paying taxes on crypto gains is a legal obligation, there are legitimate strategies that individuals can employ to minimize their tax liability. Here’s a look at some of these strategies.

Utilizing Losses for Tax Benefit

• Harvesting Losses: If you have crypto assets that have decreased in value, consider selling them to realize the loss. These losses can be used to offset gains from other transactions, reducing your overall tax liability.
• Carry Forward Losses: If your losses exceed your gains in a particular year, you can carry forward the excess loss to offset future gains. This can be especially beneficial if you anticipate significant gains in the upcoming years.
• There is no limitation on the extent of a capital loss that can be utilized to offset against your capital gains. However, it is important to note that losses must be claimed in order to carry them forward.

Deducting Transaction Costs

• Remember to account for transaction fees when calculating gains or losses. These fees can be deducted from the sale price, potentially reducing your taxable gains.

Tax Treatment of Lost or Stolen Crypto

• Lost Private Keys: If you’ve lost access to your crypto wallet or have been a victim of theft, you might be able to claim a capital loss. However, you’ll need to provide substantial evidence. First you need to file a claim of negligible value. If this claim is approved, you could subsequently claim your lost cryptocurrency as a capital loss.

Annual Exemption

• Remember to factor in the annual tax-free allowance when calculating your gains and losses. Even if your gains are below this threshold, reporting them ensures transparency and compliance.
• The Capital Gains Tax-Free Allowance in the tax year 2023/2024 is £6,000 for individuals.
• The Capital Gains Tax-Free Allowance in the tax year 2024/2025 is £3,000 for individuals.
• The personal income Tax-Free Allowance is up to £12,570 per year.

Gifting Cryptocurrency

• Giving cryptocurrency as a gift to your spouse can be advantageous, especially if your partner has not utilized their capital gains allowance for the current year.

Helpful Strategies for Crypto Taxation

Navigating the maze of crypto taxation can be daunting, but with the right strategies, you can optimize your tax situation. Here are some smart strategies to consider.

Finding a Crypto Tax Advisor

Engaging a tax advisor who specializes in cryptocurrencies can be invaluable. They can provide tailored advice, ensure compliance, and help you navigate complex tax scenarios.

Using Tax Calculators

Several online platforms and software tools offer crypto tax calculators. These tools can automatically import your transactions, calculate gains and losses, and generate tax reports, simplifying the process.

Keep record of your transactions

Maintaining accurate records of all your cryptocurrency activities and transactions is crucial. Utilizing software tools like CoinTracking can assist you in effectively tracking your crypto-related information and fulfilling your tax obligations.

International Crypto Tax Considerations

The global nature of cryptocurrencies means that tax implications can vary significantly from one country to another. While we’ve delved deep into the UK’s crypto tax landscape, it’s essential to understand how other major countries approach this domain, especially if you’re involved in cross-border transactions or reside in multiple jurisdictions.

Crypto Taxes in the US

In the United States, cryptocurrencies are treated as property for tax purposes. This means that capital gains and losses rules apply to crypto transactions. Use our guide to learn about cryptocurrency taxation in the US.

Crypto Taxes in Canada

Canada views cryptocurrencies as a commodity. As such, any income from disposing of crypto is considered a taxable event. Find out more about cryptocurrency taxation in Canada using our guide or visit the government’s declaration page.

Crypto Taxes in Australia

The Australian Taxation Office treats cryptocurrencies as property that is subject to capital gains tax. If you hold onto your crypto for more than a year, you might be eligible for a capital gains discount. Find out more with our taxation guide.

Crypto Taxes in Germany

If an individual holds a cryptocurrency for more than one year, any gains from selling it are tax-free. However, if the crypto is sold within a year of acquisition, it may be subject to income tax. Use our guide to learn about cryptocurrency taxation in germany.

Conclusion

Navigating cryptocurrency taxation can be challenging, but tools like CoinTracking simplify the process. This software streamlines the tracking and reporting of crypto transactions, ensuring compliance with tax regulations. As the crypto landscape evolves, it’s essential to stay informed and utilize reliable tools to manage tax obligations effectively.

Note: This article is for informational purposes only and does not constitute financial or tax advice. Always consult with a professional before making any decisions.