Are you playing around with crypto? Another element you need to work on while investing in cryptocurrency is a tax because the amount you get after paying taxes is a legit profit. The tax filing season in the UK begins on April 6 and lasts until April 5 of the following year.
Many traders, investors, and industry authorities are increasingly interested in cryptocurrencies. Even HMRC has changed their instructions in response to its recent surge in popularity to guarantee that all investors are paying the appropriate amount of tax.
Maybe you must settle part of your expenses by July 31 if you’re completing a self-assessment. The dates may be simple to recall, but UK tax advice on cryptocurrencies can quickly become complex.
Explanation Of Crypto Tax in the UK
In the ten-year history of cryptocurrencies, Bitcoin’s value has changed several times dramatically. When Bitcoin’s value peaked in 2017 at just under $20,000 or in 2021 at $67,000, those who purchased it back in 2008 when it was worth pennies on the dollar may have made millions in profit. At that point, the UK government decided to levy a tax on cryptocurrency’s capital gains.
Although cryptocurrencies are relatively new, the laws governing them are still being developed. Whether exchange, utility or security tokens, HMRC does not view crypto assets as a form of money. However, how the tokens are utilised affects whether or not they should be taxed.
In their most recent Crypto assets Taskforce study, HMRC divided cryptocurrencies into three different sorts of assets to address the taxation of such assets:
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- Exchange Tokens: A digital asset native to a cryptocurrency exchange, like bitcoin and Ethereum, is known as a crypto exchange token.
- Security Tokens: Security tokens are online assets that serve as a blockchain token’s representation of transferred ownership rights or asset worth. Using tokenisation, a security token is produced where the investment conditions are chosen.
- Utility Tokens: Like conventional fiat currencies, cryptocurrencies are meant to be used as a medium of exchange and to have a specific value. Contrarily, utility tokens are non-cash assets more analogous to a ticket or coupon.
Using the tokens will determine how you are taxed on them. Since cryptocurrencies are still a new field, HMRC approaches the tax treatment of these tokens on a case-by-case basis.
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Is Paying Tax on Crypto Obligatory?
You may be wondering if HMRC is still working on the progression of cryptocurrency tax, then is it obligatory to pay taxes on it? Yes, however, there are some exemptions to the rule. The capital gains tax allowance is £12,300.
Key financial organisations do not view cryptocurrencies as money or currency. Cryptocurrency holdings are considered shares for tax purposes and will be taxed. Tax officials will keep a tight check on legal crypto investments even though cryptocurrency trading has a reputation for being dishonest.
You can take advantage of more advantageous tax regulations if you do not have a domicile in the UK or are not a UK tax resident.
What Kind of Taxes Do UK Citizens Owe?
If you sell the cryptocurrency, exchange, or otherwise dispose of any cryptocurrency, you may be required to pay capital gains tax. When you trade cryptocurrency in exchange for items or services or when these are given away to another person, you can also be required to pay capital gains tax (other than a spouse).
In situations where crypto assets have been obtained as a salary, through mining, or airdrops in exchange for a service, or expected service, income tax and national insurance contributions are also due. Planning for inheritance tax should also be considered since it may also be required upon death.
Your crypto assets will be subject to taxation at the current capital gains tax rate of 20% if you are a higher or extra rate taxpayer. Based on their taxable income, essential rate individuals will be taxed differently.
When Are Taxes Paid on Crypto in the UK?
- Buying and Selling Crypto: You’ll probably have to pay capital gains tax on the profit if you sold your cryptocurrency for more than you paid. If you experienced trading losses, such losses might have helped to reduce your capital gains tax obligation. The sale of cryptocurrency to other investors or liquidation during a cryptocurrency swap will result in a capital tax. Thus, it’s vital to keep this in mind.
- When You are Paid in Crypto: You must pay income tax and social security obligations regardless of the cryptocurrency you are paid in or who pays you.
- Mining and Validating: HMRC will treat you as a hobbyist who must pay tax on investment income if your mining operation is small—for example, if you mine bitcoin on one computer in your leisure time. Consider including your mining income in your trading gains if it appears like you are operating a mining firm.
- Airdrops: Airdrops are exempt from income tax if you get them free and are not compensated through mining or commerce. You must declare any airdropped tokens you accepted as payment for services as income. A capital gains taxable event will probably occur when a person sells their tokens.
- DeFi Protocols: DeFi taxes can be challenging, and every protocol is unique. Even if you still have control over the token, the HMRC may view lending or invest in it as a capital gains disposal. This is true unless you knew the return when you began betting or lending; in that case, it is still revenue. It counts as income if the DeFi protocol pays you. How DeFi is classified under UK tax law depends on several additional circumstances, including whether your returns are produced as a one-time payment (likely capital gains) or recurring payments (income), as well as how long or short the loan is.
Tax Rates in the UK
If you declare the cryptocurrency income as income, it will be subject to income tax, ranging from 0% to 45%. See the table below for information about England, Wales, and Northern Ireland. Scotland adds two additional bands, a beginning rate of 19% and an intermediate rate of 21%.
| Type of asset | Basic rate | Higher rate |
| Shares | 10% | 20% |
| Residential property | 18% | 28% |
| Bitcoin/Cryptocurrency | 10% | 20% |
| Other | 10% | 20% |
If you look at this information, you can learn more about submitting a tax return specifically for cryptocurrencies. Tax advisors in Stratford, London has a team of professionals who can assist you with this.
