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Around 2.3 million people in the UK owned cryptocurrency in 2021, up from 1.9 million in 2020, according to research by the Financial Conduct Authority.

These figures show the rising popularity of Bitcoin and other forms of digital currency and many individuals and businesses are buying cryptocurrency as a new way to make investments.

With transactions in cryptocurrency comes UK tax liabilities. See below for our guide to paying tax on cryptocurrency.

What is cryptocurrency?

Cryptocurrency, also known as crypto, is a digital or virtual currency that only exists online. It is secured using cryptography which prevents counterfeiting and fraud.

Cryptocurrency transactions are managed using distributed ledger technology (DLT), a decentralised database that removes the need for cryptocurrency to be issued or controlled by a central authority such as a bank or government. The most well-known DLT system is blockchain.

Launched in 2008, Bitcoin was the first type of cryptocurrency. Since then, many other cryptocurrencies have been created including Ethereum and Litecoin.

You can pay for goods and services using cryptocurrency, but many people buy and sell it as an investment.

Fundamentally, while cryptocurrency can be used as a means of exchange, it is not recognised as currency or money since it can be too volatile as a reliable store of value and not widely enough accepted as a means of exchange and it isn’t recognised as a unit of account. For those reasons, cryptocurrency has its own taxation regime.

Where is cryptocurrency located for tax purposes?

Since cryptocurrency is digital in nature, it does not have a physical location. It is still necessary to determine the location for tax purposes. This is particularly relevant for:

  • UK resident and non-domiciled individuals when computing their tax liabilities
  • Considering whether a matter involves an offshore tax disclosure

Where a cryptocurrency is simply a digital representation of an underlying asset, then the location of the cryptocurrency will be the location of the underlying asset. Typically, this won’t be applicable to most forms of cryptocurrency.

Instead, cryptocurrency is normally distinct from any underlying asset and its location will be determined by the residency of the beneficial owner, which gives a clear, logical, predictive and objective rule which can be easily applied.

Do you pay tax on crypto gains?

Where a client is buying and holding crypto assets and then selling them according to market conditions, they are likely to be investing and their gains or losses will be taxed as capital.

The broad position is:

  • If a client holds cryptocurrency as a personal investment, they will be subject to Capital Gains Tax (CGT)
  • If a client trades cryptocurrency as a business activity, income will be subject to income tax

Whether the activity amounts to a taxable trade (with the crypto assets as trade receipts) will depend on the particular facts, taking into account a range of factors such as degree of activity, organisation, risk and commerciality

In most cases, HM Revenue & Customs (HMRC) views the buying and then ‘disposing’ of cryptocurrency for a personal investment as an asset. This means you have to pay CGT on any profits that you make, and income tax on certain miscellaneous receipts arising as a result of crypto investment such as Airdrops, Forks, Mining, Staking and Loan Interest.

This article focuses on personal investment rather than trading.

HMRC describes units of cryptocurrency as ‘tokens’. It says a ‘disposal’ of tokens includes:

  • selling them for money
  • exchanging them for a different type of token
  • using them to pay for goods or services
  • giving them away to another person (unless it is a gift to a spouse or civil partner)

Crypto Capital Gains Tax rates

Like for other assets, you pay CGT on profits from the disposal of cryptocurrency after the tax-free allowance of £12,300.

The rate you pay is dependent on your total earnings and your tax status:

  • Basic rate taxpayers: 10%
  • Higher and additional rate taxpayers: 20%

Miscellaneous receipts

Various miscellaneous receipts can arise as a result of crypto investment which can be summarised as follows:

  • Airdrops – receipt of crypto free of charge from cryptocurrency start-ups to raise awareness, reward early investors and those who share awareness and to create value through increased trading – taxed as miscellaneous income
  • Forks – occur when there is a change in the operation of the blockchain. These can be ‘soft’ where a change occurs to the existing blockchain, or ‘hard’, where the blockchain splits. Soft forks generally have no tax consequences, but hard forks give rise to new crypto subject to capital gains tax on a subsequent sale.
  • Mining – validating and confirming new blocks for the crypto network in certain crypto-currencies – taxed as miscellaneous income.
  • Staking – a way of putting existing crypto to work to validate transactions and earn a passive income – taxed as miscellaneous income.
  • Loan interest – there are a number of ways cryptocurrency can be deposited to earn crypto in the same currency as that deposited or in alternative currencies – taxed as miscellaneous income (not interest income).

Crypto miscellaneous Income Tax rates

Income tax is due after your total income from all sources exceeds your personal allowance of £12,570. The personal allowance may be restricted if your total income exceeds £100,000.

The first £1,000 of miscellaneous income will be covered by the ‘trading allowance’ if not already used against other income.

The rate you pay is again dependent on your total earnings and your tax status:

  • Basic rate taxpayers: 20%
  • Higher rate taxpayers: 40%
  • Additional rate taxpayers: 45%

How much tax do I pay on cryptocurrency?

Below are some examples of the amount of Capital Gains Tax and Income Tax payable on the profits from the disposal of cryptocurrency and receipt of miscellaneous income.

The examples assume no other gains have been made.

Cryptocurrency gains of £11,000, airdrops of £800 with a salary of £35,000:

  • Capital Gains Tax allowance of £12,300 = £0
  • Total CGT to pay = £0
  • Trading allowance of £1,000 = £0
  • Total income tax to pay = £0

Cryptocurrency gains of £20,000, staking income of £2,000 with a salary of £50,000:

  • Capital Gains Tax allowance of £12,300 = £0
  • ​£7,700 taxed at 20% = £1,540
  • Total CGT to pay = £1,540
  • Trading allowance of £1,000 = £0
  • £270 taxed at 20% = £54
  • £730 taxed at 40% = £292
  • Total income tax to pay £346

Cryptocurrency gains of £40,000, airdrops of £2,500, staking income of £2,500, with a salary of £60,000:

  • Tax free allowance of £12,300: £0
  • £27,700 taxed at 20% = £5,540
  • Total CGT to pay: £5,540
  • Trading allowance of £1,000 = £0
  • £4,000 taxed at 40% - £1,600
  • Total income tax to pay £1,600

How to pay less tax on cryptocurrency

In its Cryptoassets Manual, HMRC lists the following as examples of the allowable expenses which can be deducted from your gain:

  • the consideration (in pounds sterling) originally paid for the asset
  • transaction fees paid for having the transaction included on the distributed ledger
  • advertising for a purchaser or a vendor
  • professional costs to draw up a contract for the acquisition or disposal of the tokens
  • costs of making a valuation or apportionment to be able to calculate gains or losses

Any costs you deduct against profits for Income Tax and costs for mining activities, such as equipment and electricity, are not allowable as a deduction for Capital Gains Tax.
HMRC has a system of ‘pooling’ which it says “allows for simpler Capital Gains Tax calculations”. Each type of token enters its own ‘pool’ and each one has its own ‘pooled allowable cost’ associated with it.

However, the same cryptocurrency purchased and sold on the same day doesn’t enter the pool as those transactions are matched. In addition, the same cryptocurrency is matched if re-purchased within 30 days of a sale, so again, does not enter the 'pool' for that cryptocurrency.

Pooling can be complex so you are advised to speak to an accountant.

When do you pay tax on crypto?

You can report your cryptocurrency gains on your annual self-assessment tax return or by using HMRC’s Capital Gains Tax real time service.

Miscellaneous income above £1,000 must also reported on a self-assessment tax return.

Capital Gains Tax and Income Tax is normally due for payment by 31st January following the end of the year of assessment. In some cases, Income Tax may be due for payment in two instalments by 31st January in the year of assessment and 31st July after the end of the year of assessment.

You must keep records of all cryptocurrency transactions. HMRC says this includes:

  • type of tokens
  • date you disposed of them
  • number of tokens you have disposed of
  • number of tokens you have left
  • value of the tokens in pound sterling
  • bank statements and wallet addresses
  • a record of the pooled costs before and after you disposed of them

Paying crypto tax as a business

The advice so far in this guide applies to individual Self-Assessment taxpayers.

If you deal with cryptocurrency as a business, you may also have to pay the following taxes:

 TaxAssist Accountants can help you with your Cryptocurrency Taxes

If you are currently investing in, or considering disposing of cryptocurrency, we can advise on tax planning opportunities that could mitigate or reduce your potential tax liabilities. Call 0800 0523 555 or use our online enquiry form to book a free video or face-to-face consultation.

Date published 21 Apr 2022 | Last updated 4 May 2022

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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