Complete guide on crypto taxes in UK

Cryptocurrencies are steadily gaining popularity all over the world but the global regulators have yet not laid down a coherent approach to the taxation policies on crypto assets. Resultantly, there are disparate rules on crypto taxation across different geographies. Here we discuss how cryptocurrency is taxed and how to pay your crypto taxes in the U.K.

The U.K. tax authority, HMRC (Her Majesty’s Revenue and Customs) has laid down guidance for taxation of crypto assets in the U.K. Recently HMRC has updated consolidated tax guidance on crypto assets on March 30, 2021. This guide breaks down the UK’s cryptocurrency tax rules for easy understanding and compliance of crypto tax.

How Cryptocurrency is taxed in U.K

Types of Tokens

According to HMRC, crypto assets can be divided in four types:

1. Exchange tokens — Cryptocurrencies like Bitcoin fall into this category that have been started to be used as a means of payment. Moreover, over the last 5 years, they have become increasingly popular as investments due to potential increases in value. Bitcoin, Ethereum, Dogecoin are the best examples of an exchange token.
2. Utility tokens — Utility tokens grant the access of a particular goods or service on a platform to the token holder. Utility tokens can be exchanged or be available to trade for other tokens or currencies just like the exchange tokens. An enterprise generally releases utility tokens and commit to accept them in exchange of a particular good or service.
3. Security tokens — These tokens provide the holder with ownership rights in a business, entitlement future profits share, repayment of specific amount etc.
4. Stablecoins — These tokens minimize volatility as they are pegged to something which has a stable value such as precious metals (e.g. gold) or a fiat currency (e.g. US dollars).

You can also read our complete guide on stablecoins here

General HMRC rules on crypto taxation

HMRC does not treat crypto assets as currency or money. The crypto taxation is based on your dealing with cryptocurrency explained as below:

• If you hold crypto assets for personal investment, you are subject to the Capital Gains Tax rules. Your capital gains are taxed when you dispose your crypto assets (i.e. trading, selling, using for purchase). The capital gain is calculated as below:

Capital Gain = (GBP value of disposed asset at the time of disposition — GBP value of the disposed asset’s acquisition cost)

• If you trade in crypto assets as a business activity, your income is subject to income tax rules. HMRC does not clearly define as to what constitutes as a business activity. It decides whether an activity is business activity or not, on the basis of circumstances and facts of each case. According to HMRC, taxes are triggered by disposal activity which includes:
• Sale of cryptocurrency for fiat currency
• Exchange of a cryptocurrency for another cryptocurrency
• Use of cryptocurrency for payment of goods and services
• Giving away cryptocurrency to another person as gift or payment.

Tax implication for capital gains

There are different tax brackets based on the capital gains and income level of the individual. You can also offset capital losses if reported within four years from the time of realization of loss. If the value of cryptocurrency has dropped to zero or minimal amount, you can claim total loss. However, HMRC disallows wash sales and capital losses deductions for end of the year losses bought back within 30days for reducing the tax liability. You can report capital gains and losses on supplementary pages SA108 of your SA100 tax return. Check the table below to understand calculation of capital gains:

Allowances

UK residents have allowance of tax- free capital gains for individuals up to £12,300 for year 2020–2021 (refer to below table).

Source: HMRC

Charity donations are tax free. Also, gift of cryptocurrency to your spouse is tax-free and can effectively double your tax-free allowance in a given tax year.

Tax implications for direct crypto income

Airdrops, Rewards and Salary- Individuals are subject to income tax when they receive cryptocurrency by mining, airdrops or transaction confirmation rewards. Salary received in cryptocurrency is also subject to income tax just like the salary received in fiat currency. Income tax is also applicable where an individual runs crypto trading business and has taxable trading profits.

Hard Forks- Any allowable costs from the pre-fork initial acquisition is split between the original and new forks. Forks do not create a tax liability but it splits the cost of old assets due to which the future disposal has greater liability.

Mining- In case of mining, the fees or rewards are treated for income tax as trading income miscellaneous income depending on the organization, risk, commerciality and degree of activity. Mining expenses cannot be claimed as deduction from taxable income.

Staking- As per the new guidance released on March 30, 2021, taxation on staking activity by businesses will depend upon whether the activity amounts to a taxable trade which is determined on the basis of factors such as nature of organization, degree of activity, involved risk and commerciality. If the staking activity amounts to trade, then profits must be calculated according to the relevant tax rules. And if the staking activity doesn’t amount to trade , then the GBP value of crypto assets will be taxed as miscellaneous income.

Check the table below to understand calculation of taxable income:

Tax implications for corporations

If you have cryptocurrency based business such as mining or professional trading, your crypto holdings are taxed as income. HMRC has strict guidelines on business considerations and very rarely considers an individual investor as professional trader. Businesses can claim deduction of mining expenses but you need to pay National Insurance Contribution additionally.

Scams

HMRC does not consider crypto scam as a disposal event which means that the victim of scam or thefts cannot claim loss under capital gains tax. If you paid to receive a crypto asset and did not receive it, you will not be able to claim capital loss.

Reporting requirements

You can report your capital gains in crypto assets in real time. However, if you need to file tax return for another reason, you can report the capital gains again by Self-Assessment. The HMRC mandates to keep your transaction records or at least a year after the Self-Assessment deadline.

The UK tax year is from April 6 — to April 5 of the following year. Paper returns are due by October 31 and the electronic returns and taxes are due by January 31 of the following year. You can file your taxes online using your Unique Taxpayer Reference (UTR) by filling SA100 tax return form. HMRC calculates you how much tax you owe depending upon your income tax bracket rate. Late returns, missed tax payment deadlines and inaccurate returns are penalised.