Do you have any experience investing in cryptocurrencies? Is it completely new to you? Or are you simply intrigued by the investment possibilities?
Whatever your situation, before delving deeper into the world of cryptocurrencies and Bitcoin, it's wise to understand how HMRC tax them.
Here's everything you need to know Tax on cryptocurrencies in the UK.
If you don't have time to read HMRC's full guidance for crypto asset holders, you can find it here. Our comprehensive guide details everything you need to know about cryptocurrency tax in the UK.
Let's get started.
Do I have to pay taxes on cryptocurrencies?
Yes, for most crypto investors. However, there are some exceptions to the rule.
Cryptoassets are not considered money or currency by major financial institutions. From a tax perspective, crypto assets are treated like stocks and taxed accordingly.
Cryptocurrency traders and investors need to be aware of a wide range of transactions, from basic buy and sell orders to hard forks, airdrops, staking, and more.
The cryptocurrency industry is rapidly evolving, and tax positions are inevitably becoming more complex.
The emergence of complex cryptocurrency-like gaming and gambling platforms, non-fungible and hybrid tokens for specific purposes has transformed the asset class.
If you are not a UK taxpayer or domiciled in the UK, you may benefit from a more favorable tax regime.
When do I pay taxes on virtual currency?
There are several activities related to cryptocurrencies that are taxable.
Buying and selling cryptocurrencies
-
If you sell your cryptocurrencies for a higher price than when you bought them, you will likely pay capital gains tax (CGT) on your profits.
-
If you lose money through trading, that loss may minimize your CGT claim. It is also important to remember that exchanging cryptocurrencies creates a capital gains tax event because you are selling the cryptocurrencies to other investors or liquidity pools.
-
If you are trading large amounts of cryptocurrencies, or in what are considered to be 'exceptional circumstances', HMRC may consider you a trader and require you to pay income tax on your trades rather than CGT. There is a gender.
paid in cryptocurrency
-
You will have to pay income tax and national insurance (NI) regardless of which cryptocurrency you are paid in or who is paying you.
the cipher you inherit
Mining and verification
Cryptocurrency mining could be considered a hobby or a serious business. This depends on several factors.
-
organization
-
danger
-
activity level
-
Commerciality
Mining as a business
If a mining activity is considered a business, mining income is added to trading profits and is eligible for income tax deduction.
When you dispose of your cryptocurrencies, the value you get from them is Acquisition time This will be added to your trading profits and your trading may be subject to NI contributions.
mining as a hobby
If your mining activity is classified as a hobby, you will need to declare the income as miscellaneous income when filling out your tax return.
This will be the fair market value of your cryptocurrency at the time you receive it.
Any rewards or fees received in exchange for mining activities are also added to your taxable income.
However, you may be able to deduct reasonable expenses from your income before adding them to your taxable income. However, if you dispose of this cryptocurrency, it will be subject to CGT.
staking
According to HMRC, upon receipt, the GBP value of the vested tokens will be taxed as miscellaneous income, reduced by any reasonable expenses.
Individuals may wish to treat it as savings income and use a personal savings allowance to reduce their taxes.
If you decide to dispose of it at a later date, CGT rules may apply, so please consult your tax accountant if you are considering this.
How much tax do I pay on cryptocurrencies/cryptocurrency profits?
income tax
Income tax generally applies to those who buy, sell, or receive virtual currency through transactions.
A “day trader” is perhaps the most obvious example, someone who actively buys and sells crypto assets to generate short-term profits.
However, if an individual trades on their own account, they are unlikely to meet the description of a 'trader' for income tax purposes and are therefore more likely to be taken into account under the CGT regime.
To meet the definition of “transaction,” cryptoassets must be bought or sold with such intent, sophistication, frequency and level, or organization that the activity constitutes a financial transaction.
If you meet the trading criteria, your net profits will be subject to income tax at 20%, 40% and 45% (based on the tax bracket your income falls into) and national insurance at 10% and 2%.
Any money earned from cryptocurrencies as income will be counted towards income tax. This ranges from 0% to 45% depending on your tax area in England, Wales and Northern Ireland, plus 19% if you live in Scotland, which has two tax bands. Starter rate and 21% Intermediate rate.
capital gains tax
In most cases, people who buy, hold and sell cryptocurrencies in their own accounts will be considered to be carrying out investment activities and will be subject to CGT.
When you dispose of crypto assets, they become taxable. value of disposal proceeds Purchase and match in a specific order:
-
Crypto assets acquired on the same day
-
Crypto assets acquired within 30 days
-
Unmatched average cost of crypto assets (“pools”)
Individuals pay CGT on their total profits above the annual tax-free allowance of £6,000.
Profits in excess of this deduction are taxed at 10% up to the basic rate bracket, and profits at higher and additional rates are taxed at 20%.
Can I avoid paying taxes on virtual currency?
In some cases, individuals do not have to pay taxes on cryptocurrencies.
air drop
Airdropped virtual currency is not subject to income tax if:
However, if you receive airdrops in exchange for performing services, they are subject to income tax and classified as miscellaneous income or trading profits (for businesses).
If a crypto trader or company receives an airdrop, the increase in valuation will be added to the trading profit and will be subject to income tax along with the NI contribution.
However, if an individual receives an airdrop, it will be subject to CGT upon disposal.
Similarly, the following cryptocurrency transactions are not subject to CGT or income tax in the UK:
- “HODLing” your cryptocurrencies – basically the idea is to hold on to your cryptocurrencies for as long as possible
- Transfer cryptocurrencies between your own wallets
- Buy cryptocurrencies with fiat currencies (e.g. GBP)
- Gifting Cryptocurrency to Spouse
How to pay taxes on virtual currency
Cryptocurrency investors must report their crypto gains on their annual tax returns. Alternatively, you can pay your tax using HMRC's real-time CGT reporting service.
Keeping accurate records is very important for self-employed people, and crypto investors are one such group, who also need to keep accurate records for tax purposes.
HRMC states that crypto investors must declare:
- Token type
- date of disposal
- Number of tokens disposed of
- number of tokens remaining
- Token value in Pound Sterling
- Bank statement and wallet address
- Recording of pooled costs before and after disposal
It's important to get the right financial advice for your situation.
If you're still not sure what you need to declare, find the right financial advisor on Unbiased today.
