Cryptocurrency has become an increasingly popular investment and payment method in the UK, but understanding the tax implications can be challenging. Whether you’re trading Bitcoin, Ethereum, or any other digital currency, it’s essential to know how these transactions are taxed to avoid penalties from HMRC.
In this guide, we’ll cover how cryptocurrency is taxed in the UK, the key points you need to know, and how CANGAF Accountants can assist with your cryptocurrency tax needs.
1. How HMRC Views Cryptocurrency
HMRC does not consider cryptocurrency as money but instead treats it as an asset for tax purposes. This means that any profits made from buying and selling cryptocurrencies are subject to Capital Gains Tax (CGT). The tax treatment will depend on how you use cryptocurrency:
- Trading or Investing: Most cryptocurrency holders in the UK are classified as investors, meaning they buy and sell digital currency for profit.
- Mining: If you mine cryptocurrency, this can be treated as income, and Income Tax applies instead of CGT.
- Receiving Crypto as Payment: If you’re paid in cryptocurrency for services, this is treated as income and subject to Income Tax.
2. Capital Gains Tax (CGT) on Cryptocurrency
When you sell or exchange cryptocurrency for a profit, you may have to pay CGT on the gains. Here’s how CGT on crypto works:
What Is Capital Gains Tax?
Capital Gains Tax is a tax on the profit when you sell an asset that has increased in value. For cryptocurrency, CGT is due when you sell, exchange, or spend your crypto.
CGT Allowances and Rates
Everyone in the UK is entitled to a tax-free allowance of £6,000 for the 2023/24 tax year. Any profits beyond this amount will be subject to CGT, with the rates as follows:
- 10% for basic rate taxpayers (if total income and gains fall within the basic income tax band)
- 20% for higher and additional rate taxpayers
How to Calculate Your Gains
To calculate your gains, subtract the cost of acquiring the cryptocurrency (including any fees) from the amount you receive when selling it. If you’ve sold crypto for a loss, this can be offset against future gains, reducing your CGT liability.
Example:
If you bought £10,000 worth of Bitcoin and sold it for £15,000, your profit would be £5,000. Since this is below the annual allowance, you wouldn’t owe any CGT. However, if your profit were £8,000, you would owe CGT on the £2,000 excess.
Disposals Subject to CGT
The following are considered disposals for tax purposes:
- Selling cryptocurrency for fiat (e.g., GBP)
- Exchanging one cryptocurrency for another (e.g., Bitcoin for Ethereum)
- Spending cryptocurrency on goods or services
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CANGAF’s Tip:
CANGAF Accountants can help you accurately calculate your capital gains on cryptocurrency and ensure that you make full use of your CGT allowance.
3. Income Tax on Cryptocurrency
You may also be liable to pay Income Tax and National Insurance contributions if you earn cryptocurrency through activities such as mining, staking, airdrops, or receiving payments in crypto. Here’s how Income Tax on cryptocurrency works:
Mining and Staking Rewards
If you’re mining or staking cryptocurrency, HMRC may classify this as a trade, meaning the profits you generate from mining rewards are subject to Income Tax. The applicable rates are based on your tax band:
- 20% for basic rate taxpayers
- 40% for higher rate taxpayers
- 45% for additional rate taxpayers
Receiving Cryptocurrency as Payment
If you’re paid in cryptocurrency for services, such as freelance work or employment, this income will be taxed under the PAYE system or through self-assessment. The amount is based on the crypto’s market value in GBP on the day you receive it.
Airdrops
Airdrops, which involve receiving free cryptocurrency, may also be taxed if they are provided in exchange for services. If received as part of a business promotion or investment scheme, this can be subject to Income Tax.
CANGAF’s Tip:
If you’re mining or receiving cryptocurrency as payment, CANGAF Accountants can help you report your income accurately to HMRC and ensure you comply with Income Tax regulations.
4. Record-Keeping for Cryptocurrency Transactions
HMRC requires that individuals keep detailed records of their cryptocurrency transactions. This includes:
- Dates of transactions
- The amount of cryptocurrency bought, sold, or exchanged
- The value of the cryptocurrency in GBP at the time of each transaction
- Costs involved in acquiring the cryptocurrency, such as transaction fees
- The purpose of each transaction (e.g., sale, exchange, or purchase)
Keeping accurate records is crucial for calculating your CGT liability and ensuring you file correct returns with HMRC.
CANGAF’s Tip:
CANGAF Accountants can assist you in maintaining accurate cryptocurrency records, ensuring that you remain compliant with HMRC’s requirements.
5. Declaring Cryptocurrency on Your Tax Return
If you’ve made a profit from cryptocurrency, you must report this on your self-assessment tax return. Failure to declare taxable cryptocurrency gains can result in penalties from HMRC. Here’s how to declare your crypto:
- Register for Self-Assessment: If you’re not already registered, you must sign up for self-assessment to declare your income and gains.
- Report Gains on the Capital Gains Section: Any crypto sales that resulted in a profit should be reported in the capital gains section of the tax return.
- Include Income from Crypto: If you’ve earned cryptocurrency through mining, staking, or payments, you’ll need to report this as part of your income.
CANGAF’s Tip:
Let CANGAF Accountants handle your tax return to ensure you meet all HMRC requirements and avoid unnecessary penalties.
6. Inheritance Tax on Cryptocurrency
Cryptocurrency is also subject to Inheritance Tax (IHT) if it forms part of your estate when you pass away. Like other assets, cryptocurrency can be passed on to beneficiaries, but it may be taxed at the standard IHT rate of 40% for estates worth more than £325,000.
7. Tax on International Cryptocurrency Transactions
HMRC taxes UK residents on their worldwide income and gains, which includes any profits made from cryptocurrency investments overseas. If you have cryptocurrency in international exchanges or wallets, you must report these gains in the UK.
8. Penalties for Failing to Report Cryptocurrency Gains
HMRC has increased scrutiny on cryptocurrency transactions in recent years, and failing to report taxable gains can lead to penalties. These penalties are based on how HMRC perceives the failure to disclose:
- Innocent Error: No penalty, but the unpaid tax will need to be settled.
- Carelessness: Penalty of up to 30% of the tax due.
- Deliberate: Penalty of up to 100% of the tax due.
CANGAF’s Tip:
To avoid fines and penalties, it’s essential to report all cryptocurrency transactions correctly. CANGAF Accountants can guide you through the process and ensure your tax return is fully compliant.
Conclusion
Cryptocurrency taxation in the UK can be complex, but with the right advice, you can ensure that you’re fully compliant with HMRC regulations. Whether you’re investing, mining, or receiving cryptocurrency as payment, understanding your tax obligations is essential to avoid fines and maximize your returns.
CANGAF Accountants specializes in helping individuals and businesses with their cryptocurrency tax needs. We provide expert guidance on CGT, Income Tax, and record-keeping requirements to ensure your tax return is accurate and complete.
Contact Details
CANGAF Accountants
235 Tonge Moor Road, Bolton BL2 2HR
Email: info@cangafltd.com
Phone: 01204 859315
Let CANGAF Accountants assist you in navigating cryptocurrency taxes and managing your financial future efficiently.
