Tax is a major issue of concern for earners in the UK, and because it makes up a significant percentage of your earnings, it’s always ideal to know what your obligations are based on your occupation. The tax system varies according to different income thresholds, fields, and individuals. While crypto trading is a career that offers significant financial freedom and flexibility, the income generated from it, like that from every other job, is still subject to taxation by the UK government. However, the dynamics are a little different since authorities don’t classify this asset class as a currency. Here’s a detailed breakdown of how it works.
Are Cryptocurrencies Taxed in The UK?
The simple answer to this is yes, with some exceptions. HMRX guidelines clearly state that profits derived from cryptocurrencies are subject to capital gain tax or income tax, depending on the type of transaction. The crypto market is very broad, and there are several money-making opportunities like airdrops, staking, NFTs, and more. With some of these, you can evade tasks following certain requirements. While you might assume that these transactions are decentralised, it’s important to know that all UK-licensed trading agencies have a data-sharing program with the organisation that monitors your transactions, earnings, and details used to access your liabilities. The mandatory KYC policies also have some roles to play in monitoring investors and their financial activities with digital assets.
As a crypto taxpayer in the UK, you’re either subject to paying capital gain tax or income tax. When do both apply?
Buying and Selling of Cryptocurrencies
Some scenarios that fall under this include trading these assets for profits, selling at a loss, or swapping with other investors. This last part is liable because it essentially means you’re selling to other traders. When you make money from these transactions, you become subject to capital gains tax (CGT), where an 18–24% charge applies to earnings over £3,000. Anything below that threshold is considered tax-free. The income tax (IT), on the other hand, is restricted to crypto trading investors who actively buy and sell assets in very large volumes. If you meet this criterion, your earnings will be subject to a 20% rate. Every other trading activity, like mining, staking, and others, will also eventually fall into any of these categories when you choose to discard them for real money.
Getting Paid in Crypto
Another scenario where you might be liable for these fees is when you get paid with digital assets. This comes with a non-negotiable income tax and national insurance contributions ranging from 2% to 10%.
Other scenarios where your assets are taxed:
- Selling crypto for any other fiat currency
- Spending digital assets on goods and services
Can I Avoid Paying Crypto Taxes in the UK?
Aside from a situation where you’re earning less than £300, you can avoid these fees under some conditions with assets like airdrops. If you’re getting paid airdrops freely without having to buy and carry out other activities that could be deemed a service, then it can be tax-free. This is because the assets aren’t classified as part of a business transaction. If the reverse is the case, and it’s from a crypto trader using multiple exchanges, you’ll be subject to IT. For individuals, it’ll more likely be a CGT. Other situations that wouldn’t warrant paying these charges are:
- Gifting digital assets to a spouse
- Transferring crypto between your wallets
- Buying assets with fiat currencies like GBP
- HODLing (buying and holding a cryptocurrency indefinitely)
- Donating to charity
How To Calculate Your Tax Liabilities
The first step to this is calculating your income, and to achieve this, you need the value of your assets in GBP on the day you receive them. The capital gain or loss is the difference in the value of your asset at the time you received it and disposed of it. If you have a profit, then you should know it’ll be subject to CGT. If it’s the other way around, you can offset it against your gains. For individual investors, this is relatively easy, but might be a little more tedious for large-scale traders to calculate their all-year-round profits manually. Luckily, there are several tax calculation software programs that can do the job. At the same time, you can look into HMRC’s cost basis technique to understand your liabilities across multiple assets.
Staying Ahead of Your Tax Obligations
Now that you know what these fees entail, it’s easier to track your day-to-day activities and do a mental math of your actual profits. Remember that it’s always important to keep a record of your daily transactions, highlighting the date, amount received, transaction fees, and several other details. Although we’ve established that the HMRC automatically has access to these figures, having a personal record will help you evade any errors in billings. Crypto tax in the UK can be complex, especially if you’re active across multiple exchanges or earning through various means. Staying informed and organised is key to staying compliant. If in doubt, consult a tax advisor familiar with digital assets.