Perhaps you already know that cryptocurrencies are taxed in the UK. But now the biggest question will be, how does the taxation system work for these digital assets?
While HMRC views digital currencies pretty much the same way as traditional stocks and shares, there are a few crucial details you may want to know before investing in these assets.
For instance, you may be liable for capital gains tax if you cash out cryptocurrencies like Dogecoin and Bitcoin from crypto exchanges in the UK.
Similarly, using a crypto savings account exposes you to tax liability in the form of income tax.
In this comprehensive guide, we discuss crypto tax in the UK, including how the cost basis is calculated and whether holding idle currencies is a good strategy in the long term.
Table of Contents
How Cryptocurrency is Taxed in the UK
Cryptocurrencies are decentralised assets, meaning they don’t have a central regulatory authority like a government.
However, investors must understand crypto taxation before investing in their desired assets.
HMRC classifies cryptocurrencies in the same group as stocks and shares.
And for that reason, the capital gains tax applies to the profit you make from buying and selling digital tokens, usually at a profit. As you will find out later, the capital gains tax only applies if the total gains exceed the taxable allowance of £12,300 in the respective tax year.
Furthermore, investors generating yields from their digital currencies must be ready to pay a crypto tax.
For example, you will be expected to pay an income tax if you open a crypto savings account to earn interest payments on your idle currencies. The same applies to yield farming and crypto staking.
Finally, it’s important to understand how the taxation system works for crypto debit cards in the UK because they could potentially attract capital gains tax in the long run.
Capital Gains Tax
For a typical investor, there is a good chance that you will either make profits or losses from online investments. And in many cases, any gains you make will be subject to capital gains tax.
In the UK, investors must pay the capital gains tax on any gains above the annual tax-free allowance of £12,300.
Here’s an illustration of the capital gains tax;
- Assuming you create a new account with a crypto exchange and buy Bitcoins worth £2,000.
- Then, you store your coins in a crypto wallet for a few months.
- Later, you cash out your coins back to GBP when the value of Bitcoin is worth 50% more than what you initially paid to acquire them.
- In this case, you get £3,000 from selling your Bitcoin, giving capital gains of £1,000.
As you can see, the capital gains represent the profits you make from selling your assets.
Theoretically, you would pay a capital gains tax on the additional £1,000 after selling your Bitcoin. But as we mentioned earlier, you may still not pay any tax if the gains fall within the tax-free allowance (£12,300) for UK investors.
If you’ve been wondering if you will pay any tax when swapping cryptocurrencies, the simple answer is yes. Unfortunately, many investors tend to forget this fact when completing their transactions.
For instance, if you are swapping Ethereum for Uniswap, the HMRC will consider this a regular trade. And for that reason, you will be liable for crypto tax on the potential gains.
However, the currency’s value must be higher than what you paid for at the time of swapping for the taxation element to come into play.
Here’s an example;
- Assuming you purchased Ethereum in May at $3,000 per token.
- Then, in July, you swap Ethereum for Uniswap, when the value of Ethereum has risen to $4,500 per token.
- The value of Ethereum will have increased by half. And for that reason, you would have a £500 capital gain even if you won’t get it in pounds.
Crypto debit cards allow investors to shop online and offline while relying on their cryptocurrencies to offset their bills.
However, this is also one of the least understood concepts, especially when taxation issues come into play. In many cases, a hidden trade occurs behind the scenes when you complete your crypto transaction with a debit card.
When using debit cards, the market price of the desired asset must be converted to fiat before offsetting your bills. In the end, such transactions may attract capital gains tax.
Simply put, a capital loss outlines the difference between a low selling price of a crypto asset and its high purchasing price. It is the loss you get when an asset value decreases.
- For instance, assuming you invest up to £5,000 into Dogecoin.
- Then, Dogecoin loses up to 50% of its value from the time you make the investment.
- You will have to count your losses when converting your coins to GBP.
- So, you will receive £2,500 instead of £5,000, the initial amount.
- Ultimately, you will have recorded capital losses of £2,500.
The general belief is that investors should easily offset any liabilities with losses incurred in a financial year because HRMC only taxes capital gains. And here’s an illustration;
- Assuming you made two separate cryptocurrency trades in the 2022/2023 tax year.
- The first trade was on Ethereum worth £2,000 before cashing out at £4,500, giving capital gains of £2,500.
- And in the second trade, you invested in XRP worth £3,000, only to cash out at £2,000, giving losses of £1,000.
- With this illustration, you will have made total capital gains of £1,500 for the tax year (Taking the difference between the gains and losses).
- Crucially, HMRC will calculate the capital gains tax based on the total gains of £1,500.
Capital Gains Tax Rates
As we mentioned earlier, the capital gains tax applies if your total gains exceed the annual taxable allowance in the UK. And the payable amount will be calculated based on your tax band, which is more or less the same as the applicable rates for stock and ETF trading.
Here’s a table summary of the capital gains tax rates in the UK for the 2021/2022 and 2022/2023 tax years;
|Income Tax Band||Capital Gains Tax|
Now, let’s jump over to crypto income tax.
Crypto income tax applies every time you earn interest payments on crypto or use crypto in everyday transactions. This is attributed to market volatility, either triggering capital losses or gains.
We break down every detail in the next section;
Getting Paid in Crypto
Getting paid in crypto is sometimes likened to regular salary payments in pounds. And that means you will pay the applicable taxes the same way you would with a conventional salary.
That’s because the crypto payment can be converted to cash at any given time despite being a digital asset.
Ultimately, you will be liable for income tax and national insurance contributions.
It’s worth recalling that the money’s worth (the asset can be converted into cash) depends on the value of the digital currency when completing the transaction.
Now, this is where it gets complicated because the market volatility makes it difficult to process the tax returns accurately.
Crypto miners play a hugely important role in verifying crypto transactions before adding them to the blockchain. And for that reason, they are rewarded with cryptocurrencies.
The taxation rules for crypto miners differ slightly from most other transactions. For instance, the actual tax returns depend on your reasons for mining the currencies. Are you doing it as a full-time business or casually?
Corporation tax will apply if you are mining crypto as a fully-fledged business operation. But if you do it casually, you won’t have any tax liabilities.
Crypto Savings Accounts
Crypto savings accounts are essential if you want to earn interest payments on your idle digital currencies.
They are rapidly gaining popularity in the investment world, with trusted names like AQRU at the forefront of the latest developments. The platform offers up to 7% annual interest on popular coins like Bitcoin and Ethereum.
The tax rules around crypto mining are somewhat confusing, and this is because you should report the interest payment as part of your annual tax return. It is usually categorised as a miscellaneous income.
On top of that, the stated amount should mirror the actual value of the cryptocurrency at the exact time the interest payment is made.
- For instance, assuming you deposit a Bitcoin into your crypto savings account.
- Then you are entitled to a weekly interest income of 0.00049 BTC.
- This translates to about £15.
- So, you will have to report £15 as the exact amount when receiving your interest payment.
Top-rated crypto savings account providers like AQRU haven’t made the situation easier by distributing daily payments to account owners.
Perhaps this is one of the major reasons you should contact highly rated crypto tax platforms to handle everything automatically.
Staking and Yield Farming
Staking refers to locking up your cryptocurrencies to support a network’s blockchain. And in the end, you are rewarded with more cryptocurrencies.
On the other hand, yield farming is the process of maximising returns using decentralised finance (DeFi). Again, you earn interest payments from doing so.
The tax elements associated with staking and yield farming are similar to crypto savings accounts. Thus, the taxation will apply to any tokens received from the interest-earning arrangement.
Airdrops in the crypto world refer to the marketing strategies adopted by start-ups or new projects to give free tokens to encourage usage.
It is sometimes called an unsolicited distribution of cryptocurrencies for free. Accordingly, the start-up doesn’t raise any capital from the airdropped tokens.
You won’t pay taxes when you receive the tokens because the HMRC views it as a miscellaneous income.
However, a capital gains tax applies if you later decide to sell the tokens for cash equivalents or cash.
We have to reiterate that HMRC has no clear information about emerging crypto services like staking and tokens. And as such, it’s probably a good idea to contact a reliable tax advisor to get vital information about such liabilities.
Crypto Gambling Profits
Again, there’s little to no clarification from HMRC on crypto gambling projects and their tax elements. But considering gambling winnings haven’t attracted any taxes in the UK since 2005, we can safely assume that your crypto gambling winnings won’t be taxed.
However, they will likely attract capital gains tax if you were to sell your winnings for pounds.
Income Tax Rates for Crypto
Just like capital gains, the income tax rates are calculated by your tax band. This is highlighted below;
|Taxable Income||Personal Tax Band||UK Income Tax Rate|
|Up to £12,570||Personal allowance||0%|
It’s worth reminding that the UK taxation system works on a progressive basis. So, you may pay multiple tax rates as your income increases throughout the tax year.
Do You Pay Tax for Buying and Selling Cryptocurrency in the UK?
Yes. Buying and selling cryptocurrency is no different from trading stocks and shares. And as such, it will attract some tax liabilities. This is always classified under the capital gains tax and covers crypto swaps.
Conversely, emerging crypto transactions such as airdrops, yield farming, interest accounts, and staking will likely attract income tax.
Crypto Tax Breaks UK
Crypto tax breaks refer to the potential tax allowances you get from your crypto transactions every year. Let’s discuss this in the next section starting with the capital gains tax allowance;
Capital Gains Tax Allowance on Crypto
As we mentioned, UK investors enjoy a capital gains tax allowance of £12,300 per year. In other words, you will only be taxed if the annual gains exceed £12,300. This includes cryptocurrency and a range of traditional assets such as property, ETFs, and stocks.
This can help you maximise your returns if you can keep your transactions within the non-taxable limit.
- Assuming you had £5,000 worth of BNB at the beginning of the tax year
- Then, you cash out your BNB investment valued at £15,000
- Your capital gains, in this case, become £10,000
- Because it falls within the non-taxable limit, you won’t pay the capital gains tax if it is the only investment for the tax year.
Conversely, you will have to pay the capital gains tax if the total gains exceed the £12,300 non-taxable limit.
- Assuming you invest in Shiba Inu worth £2,000
- Then, you cash out in 6 months when the value has increased by 5,000%, receiving £100,000
- In this case, the total gains will be £98,000
- This is clearly beyond the £12,300 non-taxable limit, with the taxation calculated on the total gains of £85,700
- Again, the actual tax will depend on your tax brand and can be basic (10%) or additional/higher (20%)
Always remember that the capital gains allowance includes all tradable assets per year. And to determine the total tax, you can include all gains and capital losses in the respective year.
Income Tax Allowance
If you deal with emerging investments like yield farming, interest accounts, and staking, you will be liable to income tax. Again, UK investors will be happy to find out that there’s an annual income tax allowance on cryptocurrency and other assets.
UK residents enjoy an income tax allowance of £12,570 in the 2022/2023 tax year. However, it’s important to remember that the amount can increase every year because of inflation.
And more bad news for investors will be that the UK government recently announced that they will be freezing the income tax allowance for four years. So, you can expect the figure to stay at £12,570 for at least a couple of years.
But on the brighter side, though, you won’t pay any tax if the total income is below £12,570.
Here’s an illustration of the crypto income tax in the UK;
- Assuming you earn a taxable salary of £20,000 in the 2022/2023 tax year
- And you also get £500 and £1,000 from yield farming and crypto staking, respectively
- So, in total, you receive an annual taxable income of £21,500
- If you subtract the yearly taxable allowance (£12,570), the taxable income becomes £8,930
- With that, you will pay a 20% tax as a basic tax band
- The actual amount, based on the taxable income (£8,930), becomes £1,786
Several factors influence the crypto income tax. So, don’t rely on our illustration when making your estimations. At the very least, you should contact a trusted tax advisor to get accurate figures based on your total crypto income.
What Crypto Transactions Are Exempted from Tax in the UK?
Are some crypto transactions exempted from tax in the UK? The answer is yes and let’s answer this question in the next section;
No Tax Unless Crypto Gains Are Achieved
Capital gains tax only applies if you realise your profits. Or, as some would say, after cashing out your crypto, usually at a profit. That means you can navigate the taxation scheme by holding onto your tokens a little longer.
This can be an effective strategy in the long run if you have high returns from your crypto investments.
- For instance, assuming you made £10,000 in capital gains from ETFs and stocks throughout the 2022/2023 tax year
- Additionally, you have a valuable Bitcoin investment that could easily generate £5,000 in gains
- In this case, your best strategy will be to cash out £2,300 and hold the remaining amount for at least another tax year
- This will keep everything below the taxable allowance (£12,300)
- Later, you can cash out the remaining amount (£2,700), presumably in the next tax year
Perhaps the last thing to keep in mind pertains to married couples, eligible for up to £24,600 capital gains allowance per tax year. This can be an underrated strategy when maximising your annual allowances.
Investing in Cryptocurrency
Investing in cryptocurrency in the UK is the same as trading traditional assets like stocks and shares. Therefore, you won’t pay taxes if you buy cryptoassets from a trusted broker or an exchange platform.
Additionally, you won’t pay the stamp duty tax when buying cryptocurrency, saving you another 0.5%.
Transferring your cryptocurrency from your wallet to another won’t attract any taxes. The same applies to wallet-to-wallet transactions that come with no tax liabilities.
Charity donations don’t attract any taxes in the UK as long as it’s registered in the country.
How Does HMRC Determine Your Crypto Assets?
Crypto transactions are best described as pseudonymous despite the widespread notion that they are completely anonymous. Thus, analytical companies can track every transaction if they want to.
Furthermore, exchange platforms and brokers are free to offer their services in the UK as long as they comply with the HMRC and FCA regulations. So, never assume that your crypto transactions are anonymous.
UK Cost Basis Method
You will probably want to know how HMRC deploys the cost basis method before you get started.
Simply put, the cost basis method describes how HMRC calculates the initial value of your cryptocurrency to determine the expected capital gains tax. The three most common rules in the UK are discussed in the next section;
1. Same-Day Rule
The Same-Day Rule is commonly associated with day trading positions. For example, assuming you purchase Ethereum at $30,000 and sell it a few hours later at $35,000, your cost price is $30,000.
2. Bed and Breakfast Rule
The Bed and Breakfast Rule comes into play if an investor holds their cryptocurrency positions for more than a day but less than a month. As such, you will report your profit and loss for the entire month.
3. Section 104 Rule
Section 104 Rule applies if you hold your cryptocurrency investment for a period exceeding one month. This should provide an average cost price for determining your capital gains.
Reporting Crypto Gains & Losses on Tax Returns
It’s always advisable to contact an experienced tax advisor to help you report your gains and losses on tax returns. This increases your chances of reporting accurate figures, eliminating the possible confusion if you have multiple buy and sell positions in a tax year.
Avoiding Crypto Tax in the UK
Perhaps it’s impossible to avoid paying taxes on crypto transactions altogether. However, you can considerably reduce taxes by contacting the right tax advisor. Some of the best tips that investors may adopt to lower the taxes include the following;
- Don’t sell your cryptocurrency investments to avoid the capital gains tax.
- Minimise the number of crypto investments you sell in a tax year to stay within the non-taxable allowance.
- Donate a few cryptocurrencies to charities to reduce the gains.
- Work with a crypto tax platform to identify any issues with your previous transactions.
Of course, there are other strategies you may want to adopt to lower the tax liabilities. And at the end of the day, everything depends on your preferences.
Is Crypto Interest Taxed?
Yes. Crypto interest falls within your income tax liabilities for the tax year. It’s almost impossible to avoid or lower the tax liabilities in this case because most crypto savings accounts distribute the interest payments every day.
AQRU – Best Crypto Savings Account?
One of the easiest ways to lower tax liabilities or avoid them altogether is to hold onto your crypto investments for as long as you can. It is one of the best ways to navigate your way around the capital gains tax because if you don’t make any gains, nothing will be taxed.
However, if you intend to hold onto your crypto investments, opening a crypto savings account and earning interest from your idle digital currencies is probably a good idea.
This is where AQRU comes in, as one of the UK’s most reliable crypto savings account providers, committed to helping investors earn interest payments on idle currencies.
Receive as Much as 12% Annually in Crypto Interest at AQRU
With an AQRU account, UK investors can deposit Ethereum, Bitcoin, and other popular cryptocurrencies and earn as much as 7% interest per year. It’s even better with stablecoins like USD Coins and Tether, earning you as much as 12% per year.
In doing so, you will avoid the capital gains tax for as long as possible while getting the interest payments daily.
Another outstanding feature about AQRU is that it supports multiple payment methods, including bank transfers and credit/debit cards in pounds and pence.
Finally, the lack of the lock-up feature means you can withdraw your capital gains anytime without restrictions.
In conclusion, every investor should never forget that cryptocurrencies are taxed in the UK. And the first instance is when you make capital gains from your investment, which attracts the capital gains tax.
On top of that, you will be liable for an income tax if you open a savings account or opt for emerging services like staking and yield farming.
Many investors will be relieved to find out that they can evade possible tax liabilities by opening a crypto savings account. This option will also earn them an interest income, payable every day.
For these reasons, choosing crypto savings account providers like AQRU makes absolute sense. With this platform, you can earn 7% and 12% interest on Bitcoin/Ethereum and stablecoins, respectively.
Frequently Asked Questions
Are cryptocurrencies taxed in the UK?
Yes, cryptocurrencies are taxed in the UK, and HMRC categorises them in the same group as traditional assets like stocks and shares. As such, capital gains and income tax will apply.
How much crypto is tax-free in the UK?
UK investors enjoy a capital gains allowance of £12,300 per tax year. So, you will only be taxed if the gains exceed the tax-free limit. Similarly, they also get an income tax allowance of £12,570 in the 2022/2023 financial year.
Can you avoid crypto tax in the UK?
You can avoid crypto taxes in the UK by holding onto your tokens for as long as possible. By doing so, you won’t make any capital gains and, thus, avoid tax liabilities.
But remember that UK investors enjoy an annual tax allowance of £12,300. So, you will probably want to stretch your limits first before thinking about avoiding crypto taxes altogether.
How do crypto winners avoid a tax shock?
The best way to avoid a tax shock is to assess and understand your tax liabilities.
How much tax do you pay on crypto capital gains in the UK?
UK residents get a tax allowance of £12,300 per tax year. After that, they pay a crypto tax, depending on their tax band. This includes 10% and 20% on basic and additional bands.