In November 2023, His Majesty’s Revenue and Customs (HMRC) released new guidelines for filing taxes on cryptocurrencies in the United Kingdom. The new regulatory regime covers trading, payments, income, mining, gifts, and business activity in crypto assets.
This article is a guide to the crypto tax regulation in the UK and contains everything that you need to know about dealing with cryptocurrencies if you reside in the country.
UK’s Defenition of Crypto Assets
The HMRC has categorized crypto assets into three categories: exchange tokens, utility tokens, and security tokens.
Exchange tokens are cryptocurrencies issued by a trading platform that functions as a utility token. They can be traded on secondary markets or held on to for speculative purposes. The value of exchange tokens is determined by the health of the exchange issuing them.
Utility tokens are cryptocurrencies that are created on a blockchain and are native to the platform they are used on. These assets provide users with access to a company’s products or services.
Security tokens are the blockchain equivalent of a security asset traded on the stock market. These tokens are linked to fractional or total ownership of an asset on the blockchain. It is created with the intent to raise funds, generate returns, or pay dividends.
The UK’s crypto tax guidelines apply to all three types of cryptocurrencies, but the HMRC said it may have to adopt a “different” tax treatment for utility and security tokens.
The HMRC does not consider cryptocurrencies as legal tender but rather as an asset. The regulator also understands that most individuals hold crypto assets as a personal investment and will pay capital gains tax when they sell their tokens.
Should You Pay Taxes On Cryptocurrencies In The UK?
The UK government has determined an annual exempt amount for cryptocurrencies. You will only need to pay capital gains tax on overall gains from the sale of crypto assets if it goes above the annual exempt amount.
The annual exempt amount will change from 6,000 GBP to 3,000 GBP in April 2024.
Here is a list of crypto-related activities that are taxable by law:
- Capital gains over 3000 GBP (effective April 2024)
- Income generated from Bitcoin mining, token airdrops, and DeFi rewards
- Salary received in cryptocurrencies
Tax on Individual Capital Gains or Losses
Capital gains tax is calculated based on the profit or loss made from disposing of them. HMRC defines disposal as selling cryptocurrencies, exchanging one token for another, and giving away crypto to another person as a gift or in exchange for goods or services.
Capital gains and losses are to be reported on supplementary pages SA108 of your SA100 tax return.
Certain costs can be deducted when calculating crypto gains or losses, such as the original amount at which the cryptocurrency was purchased, transaction fees, and professional costs concerning buying or selling the assets.
Capital losses from crypto transactions are considered for your tax liability. If the crypto is sold at a loss, then the loss amount can be deducted to reduce your overall capital gain tax rate. You can also claim total losses for crypto if its value has dropped to zero or a minimal amount. These losses must be reported to the HMRC.
Capital gains tax rates also depend on your income rate band;
- 10% for basic rate income band – 12,751 GBP to 50,270 GBP
- 20% for higher rate income band – above 50,270 to 125,140 GBP
- 20% for additional rate income band – over 125,140 GBP
Crypto Gift Taxes in the UK
If you happen to give cryptocurrencies to someone who is not your spouse or civil partner, then the fiat value of the gifting amount will be considered as a capital gain for the recipient even if they haven’t cashed out the token.
However, crypto donated to charitable organizations is not subject to capital gains tax unless the donation is more than the acquisition cost.
Crypto Taxes on Income From Mining, Airdrops, or Payments
If you are involved in crypto mining, received tokens through an airdrop, or received crypto in exchange for goods or services, then those earnings will be subject to income tax. The taxpayer will also have to pay the national insurance contribution.
Crypto Income Tax Rates
- 0% for personal allowance– up to 12,751 GBP
- 20% for basic rate income band – 12,751 GBP to 50,270 GBP
- 40% for higher rate income band – above 50,270 to 125,140 GBP
- 45% for additional rate income band – over 125,140 GBP
Crypto Taxes on Income From Staking and Lending
According to guidance issued on the crypto tax treatment, earnings from staking and DeFi lending activities should be taxed on a case-by-case basis. This means that some income may be taxed as capital assets, while others will be treated as income.
The government will tax your earnings based on whether they are in exchange for a service or from an increase in the value of an asset invested by you that is originally owned by a crypto company.
Crypto Taxes for Corporations
If you are someone who operates a professional crypto trading or Bitcoin mining business, then your crypto holdings will be taxed as income instead of capital gains.
How to Keep Records of Crypto Transactions
HMRC recommends keeping separate and individual records for crypto transactions in the case that an exchange only records transactions for a limited time or if the platform shuts down before your tax return is completed.
One way to do this is to sync your transaction history from all exchanges in a crypto tax calculator. Any gains or losses made must be converted to their respective value in pound sterling for the tax return, even if they are crypto-to-crypto trades.