With the ever-evolving nature of cryptocurrencies, it can be difficult to stay on top of what you could owe. If you have ever held, sold, traded, spent or gifted cryptocurrency you could be liable to pay taxes.
Taxation of cryptocurrency in the UK
In the UK, cryptocurrencies are treated as an asset, not currency. This difference means that you can be liable to pay tax when you are looking to 'dispose' of your crypto assets, such as selling, trading, or using them for purchases. Depending on the nature of the transaction, individuals may be liable for Capital Gains Tax (CGT) or Income Tax.
HMRC's monitoring of crypto transactions
HMRC has enhanced its capabilities to track cryptocurrency transactions. Through data-sharing agreements with UK crypto exchanges and platforms, HMRC can access transaction and account information as far back as 2014.
When do you pay Capital Gains Tax (CGT) on crypto?
When you dispose of cryptocurrency whether by selling it for GBP or other fiat currency, exchanging it for another crypto, spending it on goods and services, or gifting it you may incur a capital gain or loss. The gain is calculated by subtracting the cost of the coin/token (including transaction fees) from the profit on disposal.
- Annual exemption amount: For the 2024-2025 tax year, the CGT allowance is £3,000. Profit/ gains exceeding this amount are taxable.
CGT rates: Due to the Autumn Budget, form October 30, 2024, CGT rates are 18% for basic rate taxpayers (earning less than £50,270) and 24% for higher and additional rate taxpayers (more than £50,270 and £150,000 respectively). These rates apply to gains realised after October 30, 2024.
How is crypto taxed?
To find how much you owe you need to calculate your cost basis. This is worked out by how much it costed you to buy the crypto + any transaction fees. Once you have your cost basis figured out you minus it from the value of the crypto when you sold it to calculate your capital gain.
| Cost basis |
Crypto cost
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+
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Fees
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| Capital gain |
Value at sale/ disposal
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-
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Cost basis
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Investors often trade multiple assets, multiple times a year, this can create confusion as to what is owed and when. In the UK HMRC applies the following 3 methods when it comes to calculating your cost basis:
- Same-Day Rule: When buying and selling the same cryptos within the same day, cost basis needs to be calculated on your gains/ losses on that day. If you are selling more than was bought on that day, the next rule should be considered.
- Bed and Breakfasting Rule: If the same cryptos are sold and then repurchased within 30 days, the cost basis is calculated on the cryptos you purchased within these 30 days to calculate gains/ losses. If you are selling more than was bought within these 30 days, the next applicable rule should be applied.
- Section 104 Pooling Rule: If neither of the above rules applies to a particular crypto transaction, the Section 104 pooling method is used. This involves calculating an average cost basis for all holdings of the same cryptocurrency by adding up the total purchase cost and dividing it by the total number of units held.
When do you pay Income Tax on crypto?
Certain crypto-related activities are considered income and are subject to Income Tax. These include:
- Mining: Rewards received from mining activities.
- Staking: Earnings from staking tokens.
- Airdrops: Tokens received from airdrops, especially when received in exchange for services or as part of a promotion.
- DeFi activities: Earnings from certain decentralised finance operations, depending on their nature.
Income from these activities should be declared in the tax year they are received and will be taxed according to your Income Tax band.
Crypto mining
Income from mining is subject to Income Tax. Whether mining is a business or hobby depends on factors like degree of activity, organisation, risk, and commerciality. If mining is deemed a trading activity, expenses may be deductible, and profits will be subject to Income Tax and National Insurance contributions. If considered as a hobby, you are still liable for Income tax (as miscellaneous income) and CGT when disposing of the mined assets.
Taxation of airdrops and forks
- Airdrops: If you receive an airdrop with providing any services or consideration, and or part of a trade or business involving crypto assets, you'll pay Income Tax upon receipt. As a caveat they are not considered income if you haven't provided any service or action when received but CGT may apply upon disposal.
- Soft forks: When a cryptocurrency undergoes a soft fork, you'll receive no new assets, so the original cost basis will apply to the new cryptocurrency.
- Hard forks: When a cryptocurrency undergoes a hard fork, resulting in new tokens, your cost basis is calculated from your tokens from the previous blockchain. HMRC still does not consider the receipt of these new tokens as taxable income. However, CGT may be applicable when these new tokens are disposed of.
UK crypto taxes FAQs
- Capital Gains Tax (CGT): If you sell, exchange, or gift crypto and make a profit, you may owe 10% (basic rate taxpayers) or 20% (higher rate taxpayers) on gains above the £6,000 tax-free allowance (2024/25).
- Income Tax: If you receive crypto from mining, staking, airdrops, or as payment, it's taxed as income at 20%, 40%, or 45%, depending on your tax bracket.
Yes, if you have made taxable crypto gains or income.
- If your total capital gains exceed £6,000 (2024/25), you must report it to HMRC.
- If you receive crypto as income, you need to include it on your Self-Assessment Tax Return.
- Even if you make losses, you should declare them to offset future gains.
Yes, HMRC actively monitors crypto transactions.
- HMRC has agreements with crypto exchanges like Coinbase, Binance, and Kraken to collect user data.
- UK-based exchanges must report transactions, and HMRC can request data from overseas exchanges.
- Failure to report taxable crypto transactions may result in penalties, interest charges, or investigations.
Yes, swapping one crypto asset for another (e.g., Bitcoin to Ethereum) is treated as a disposal under Capital Gains Tax rules.
- Your gain/loss is calculated based on the market value of the crypto at the time of exchange.
- HMRC considers each swap a separate taxable event, meaning even if you don't convert to GBP, you may still owe tax.
Conclusion
Understanding the tax implications of cryptocurrency activities in the UK is crucial for compliance and effective financial planning. Given the evolving nature of tax regulations, it's advisable to stay informed and consult with tax professionals or refer to official HMRC guidance for personalised advice.
Need advice on your crypto taxes?
Cryptocurrency taxation can be complex and ensuring compliance while optimising your tax position is crucial. Whether you need help with capital gains calculations, income tax on crypto, or understanding HMRC's latest rules, our expert team is here to assist. Get in touch today for tailored advice on your crypto assets.