Cryptoassets (also known as ‘tokens’ or ‘cryptocurrency’) are digitally secured representations of value or contractual rights that can be: transferred, stored, and traded electronically. The big question for crypto enthusiasts is whether cryptocurrency is taxable, and if so, what are the tax rates. We’ll take a look at the crypto tax of the UK and a few other things you need to know.
Cryptocurrencies are still considered new assets, and their regulations are still in the works. HMRC does not consider crypto assets such as exchange, utility, or security tokens to be money. The usage of the coins determines the taxation policy. There are a variety of exchange tokens that are accepted as a form of payment, similar to Bitcoin. As a result, if you own crypto-assets such as Bitcoin as a personal investment, you must pay Capital Gains Tax. On the profits, you make from them. HMRC has also agreed to disclose information on Coinbase users who have more than €5,000 in crypto assets on the platform during the 2019-20 tax year.
Types of Tokens
HMRC categorizes cryptocurrencies into four major heads:
Exchange tokens: They are meant to be used as a form of payment. One of the most widely known exchange tokens is bitcoin.
Utility tokens: These tokens provide holders with access to particular goods and services on a platform, usually using distributed ledger technology.
Security tokens: Tokens that represent ownership, the repayment of a sum of money, or future profits as a share of a company.
Stablecoins: Cryptoassets linked to the value of fiat money or other assets.
Crypto Tax (UK): Why is there a tax on cryptocurrency?
At different points in the ten-year history of cryptocurrency, Bitcoin has fluctuated significantly in value. In 2017, when the value of Bitcoin reached almost $20,000, those who bought it in 2008 when it was worth around a dollar could potentially have made hundreds of millions of dollars in profit.
Profits over £12,300 in the UK are subject to tax. No matter how you perceive cryptocurrency, the gains you make from your investments are always taxable.
The HMRC does not see crypto assets as money or a currency, and they have published a guide for filing taxes on cryptocurrency in the UK.
If you live in the United Kingdom and own crypto assets as a personal investment, you are liable to pay tax on any profits you make. However, you only need to pay capital gains tax on the overall gain above the annual exempt amount of £12,300. Cryptocurrencies received from mining, confirmation rewards, airdrops, and salary from an employer are taxable. Crypto assets donated to charity are not subject to capital gains tax unless the donation exceeds the acquisition cost.
The HMRC allows you to reduce the capital losses from the tax owed. When you sell the crypto asset, you can deduct the loss to reduce your overall capital gain. Remember that your crypto portfolio is similar to your stock portfolio. If you make a profit, you have to pay tax.
Do you need to pay crypto tax in the UK?
If you are attempting to avoid any type of tax, it is safe to assume that you are doing so in an unwise and, at worst, illegal manner! Crypto profits and taxes are no exception in the UK. If you have earned above the exempted limit, then it’s not possible to avoid paying the tax. You will, however, owe money only when you sell (or exchange for profit) your cryptocurrency, not when you buy or hold it.
Will I be taxed even if I am not a cryptocurrency trader?
There are several methods of acquiring cryptocurrency that may subject you to taxation:
- Given to you as a non-cash payment by your employer
• By mining crypto
• If you have a cryptocurrency-backed business (i.e., you trade with crypto rather than fiat). In this case, you must also pay Income Tax and National Insurance.
• You trade cryptocurrency. If you trade in volumes that HMRC considers being financial trade, you must also pay Income Tax, though this is uncommon.
HMRC does not consider crypto trading to be gambling like some forms of forex trading. As a result, you must always pay taxes on your profits.
Can I deduct my cryptocurrency losses?
If you incur a capital loss (selling your cryptocurrency for less than you paid for it), you can deduct it from your gains. However, if you do this, you must report the loss to HMRC. This is something you can do on your tax return. You can claim your losses for up to four years after the end of the tax year in which they occurred.
In case you’re wondering, the tax year runs from April 6th one year to April 5th the following year. The fiscal year 2020/21 ran from April 6th, 2020, to April 5th, 2021.
How does the HMRC compute tax?
HMRC requires you to use share pool accounting while calculating the cost basis for a coin disposition. When you spend/sell/trade cryptocurrency, you are disposing of it in the following order.
1. The Same Day Rule: states that coins acquired on the same day as the disposal are consumed first.
2. Bed and Breakfasting Rule: coins acquired within 30 days of disposal (but the person making the disposal must be a resident in the United Kingdom at the time of acquisition)
3. Crypto-pool (Section 104 Rule): price average of all previous coins purchased
The cost basis refers to the purchase price plus any associated costs. When you sell cryptocurrency, you must determine the cost basis of the sold assets so that you can deduct your costs before paying taxes. If you buy 10 BTC and then sell the entire 10 BTC, your cost-basis is simple to calculate; however, if you buy 10 BTC, sell 5 BTC, buy another 10 BTC, and then sell 5 BTC again, your cost-basis becomes more challenging to track. An easy way to keep track of your costs is to take the average cost of all your holdings and multiplying it by the sold amount. This is referred to as the Average Cost Basis, and it is used to calculate capital gains in the United Kingdom and many other countries.
What are the tax rates?
Suppose your cryptocurrency profits exceed the Capital Gains Tax allowance. In that case, you must pay tax at 10% if you fall under the standard rate. For individuals who fall into the higher tax rate category, your tax rate will be 20%. However, keep in mind that these rates are subject to change and can be revised each year. When putting money aside to do your tax return, make sure you stay up to date on any changes to CGT rates.
How can I pay the crypto tax in the UK?
To declare your income to HMRC, you’ll need to file a tax return, just like you would for any other profit tax.
Don’t worry if you’ve never done one before. If you know what you’re doing, the process isn’t too tricky. You’ll be on the right track if you follow the steps below!
1. Be sure to register for Self Assessment by October 5th.
2. Keep detailed records of your trading profits and losses throughout the tax year.
3. Pay the tax you owe by January 31st.
4. Determine the amount of tax you owe as soon as possible in order to prepare for the bill.