A guide to crypto tax

In August 2022, the Financial Conduct Authority conducted research on cryptocurrency investments in the UK. The research estimated that approximately 4.97 million people in the UK had invested in cryptocurrencies. In 2021, this was 2.3 million and in 2020 1.9 million. In just two years this research shows an increase in UK crypto investors of 162%.

Whilst there is no UK ‘crypto tax’ legislation, transactions are potentially subject to either income tax or capital gains tax.

See below our guide to paying tax on cryptoassets and cryptocurrency.

What are cryptoassets?

Cryptoassets are digital assets,the most common examples are Bitcoin and Ethereum which are types of cryptocurrency.

Non-fungible tokens (NFTs) are another type of cryptoasset. These are one of a kind digital assets, with no tangible form.

What is cryptocurrency?

Cryptocurrency is a digital token existing online. It is secured using cryptography which prevents counterfeiting and fraud.

Cryptocurrency transactions are recorded using distributed ledger technology (DLT). DLT is a decentralised database. This eliminates the need for a central authority, such as a bank or government, to issue or control cryptocurrency. The most well-known DLT system is blockchain.

Bitcoin was the first type of cryptocurrency, launched in 2008. Since then, developers have created many other cryptocurrencies, including Ethereum and Litecoin. You can pay for goods and services using cryptocurrency, and many people buy and sell it as an investment.

Where is cryptoassets located for tax purposes?

Since cryptoassets are 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

HM Revenue & Customs' (HMRC) view is that the location of cryptoassets follows the tax residence of the beneficial owner.

If a cryptoasset is a digital representation of an underlying asset, the location is the location of the underlying asset. Typically, this won’t be applicable to most forms of cryptocurrency.

Do you pay tax on crypto gains?

Disposing of cryptoassets includes:

• selling them for money
• using them to buy other cryptoassets
• using them to buy goods or services
• gifting them
• swapping them

The broad position is:

• If you hold cryptoassets as a personal investment, they will be subject to Capital Gains Tax (CGT)
• If you trade cryptoassets as a business activity, income will be subject to income tax

For the activity to be determined as trade you'd need to consider the particular facts, such as degree of activity, organisation, risk and commerciality

In most cases, HM Revenue & Customs (HMRC) views the gains on sales of cryptoassets as capital. You will have to pay CGT on any gains made, and income tax on certain miscellaneous receipts.

This article focuses on personal investment rather than trading.

Crypto Capital Gains Tax rates

Like for other assets, you pay CGT on gains from the disposal of cryptoassets above the tax-free allowance.

The rate you pay is dependent on your total earnings, your tax status and the date of disposal.

From 30th October 2024:

• Basic rate taxpayers: 18%
• Higher and additional rate taxpayers: 24%

Between 6th April 2024 to 29th October 2024:

• 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 for a reason, for example to raise awareness and reward early investors – 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 cryptoassets – 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. 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:

England, Wales and Northern Ireland

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

Scotland

• Starter rate tax payers: 19%
• Basic rate tax payers: 20%
• Intermediate rate tax payers: 21%
• Higher rate tax payers: 42%
• Advanced rate tax payers: 45%
• Top rate tax payers: 48%

How much tax do I pay on cryptoassets?

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 use England tax rates for 2024/25 and assume no other gains have been made.

Cryptocurrency gains of £2,000, airdrops of £800 with a salary of £35,000:

• Capital Gains Tax allowance of £3,000 = £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 £20,000:

• Capital Gains Tax allowance of £3,000 = £0
• ​£17,000 taxed at 18% = £3,060
• Total CGT to pay = £3,060
• Trading allowance of £1,000 = £0
• £1,000 taxed at 20% = £200
• Total income tax to pay = £200

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

• Tax free allowance of £3,000 = £0
• £37,000 taxed at 24% = £8,880
• Total CGT to pay = £8,880
• 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 cryptoassets

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.

NFTs are not pooled as they are individual assets.

When do you pay tax on crypto?

You can report your cryptoasset 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 be 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:

• Corporation Tax (find advice on reducing your Corporation Tax bill here)
• Corporation Tax on chargeable gains (CTCG)
• Income Tax
• National Insurance
• Stamp taxes
• VAT

TaxAssist Accountants can help you with your Cryptoasset Taxes

If you are currently investing in, or considering disposing of cryptoassets, we can advise on tax planning opportunities that could mitigate or reduce your potential tax liabilities. Call 01257 277 999 or use our online enquiry form to book a free video or face-to-face consultation.

Last updated: 7th November 2024