Do you have to pay tax on cryptocurrency?

Given some of cryptocurrency's characteristics, some people may hope that the asset not only offers the potential for high returns but tax-free ones too. Sadly, that is not the case. So while you may know your obligations for other investments, you also need to ensure you understand how your crypto assets will be taxed.

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Do you have to pay tax on cryptocurrency?
  • Paying tax on cryptocurrency is required if you go above the Annual Exempt Allowance on realised gains netted off against losses from the same year.
  • Cryptoassets are designated among four distinct categories by HMRC: Exchange Tokens, Stablecoins, Security Tokens and Utility Tokens.
  • Knowing the implications of the tax rates due on cryptocurrency trading profits is crucial before investing in the asset class for your overall portfolio.

Crypto tax: FAQs

  • Do you have to pay tax on crypto profits in the UK?

    You definitely have to pay tax on crypto profits that you have realised. You ‘realise’ a profit when you exit crypto positions on crypto exchanges and take the trading profits as a result. Those profits are taxable, but it is possible to reduce them through the use of allowable costs like transaction fees.

  • Do I pay tax on cryptocurrency?

    You only pay tax on cryptocurrency when you realise your profits. That means selling a crypto token that you have bought. The tax paid on the profits is in line with Capital Gains tax, which is 10% for basic rate taxpayers and 20% for higher rate taxpayers. The difference is taxable, less any allowable costs you can deduct to reduce the tax owed.

  • How do I pay tax on crypto?

    In the UK, you pay tax on crypto profits as you would do on gains made in the stock market. You need to do so through the use of a self-assessment form. If you have difficulty completing this form, many would advise speaking to a tax accountant who will be able to help you with what you owe on any type of personal investment you may hold. In terms of logistics when it comes to paying tax on crypto, once you have calculated your tax owed to HMRC, you can transfer the money straight from a bank account or with a debit card.

  • If I've made a loss on cryptocurrency do I still have to pay tax to HMRC?

    If you make capital losses, it is possible to use them to reduce your potential tax liability through trading cryptocurrency. You have to realise those losses in the same year as you realise any profits and offset them against each other. If your profit is greater than the Annual Exempt Allowance (currently set at £12,300), you will still need to pay the relevant amount of tax according to your tax rate. If it is below the Annual Exempt Allowance, technically, you will not be paying tax on your cryptocurrency profits.

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Investing may be an excellent way to generate wealth, but depending on what you invest in, and how you do so, it can mean you may need to pay more tax. Investing in cryptocurrency is no different. You may need to pay Capital Gains Tax (CGT) due to holding this asset class.

Calculating tax owed for a self-assessment tax return can be complicated, even if you are just dealing with self-employment income and expenses. That becomes even more complex when you start to add capital gains. Understanding the tax rules and what tax you need to pay is crucial before making any investment decisions, including investing in crypto. Crypto transactions can have material implications on the tax rate you eventually pay. 

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What does the HMRC deem as cryptocurrency? 

Her Majesty’s Revenue and Customs (HMRC) does not view digital currencies like standard currency. It has taken the view, instead, to group them into different types or categories: 

Exchange tokens

Exchange tokens are arguably the most common type of crypto asset. Bitcoin is a prime example of an exchange token. Exchange tokens can be used as a means of payment but are also seen by many as an investable asset in their own right. 

Utility tokens

Utility tokens and exchange tokens have many similarities. They can be traded on exchanges or in person to person transactions, so they are also an investable asset. However, they can also be seen as a means of accessing specific goods or services through a distributed ledger or platform. Businesses issue utility tokens and then accept those tokens as a form of payment for particular goods or services. 

Security tokens 

Security token holders have certain rights or interests in a business. Those rights or interests include ownership, a share of future profits, or the requirement to be repaid a certain sum of money in the future. 

Stable coins

Stable coins are pegged to a tangible asset or a fiat currency. They were invented to dampen the volatility that characterises many cryptocurrencies

What are the tax implications of making profits on cryptocurrency?

In the main, if you are a UK resident, you may need to pay CGT if you:

  • Sell any tokens 
  • Exchange tokens for another type of digital asset (i.e. Bitcoin to Ethereum tokens) 
  • Use your digital currency tokens to buy goods or services
  • If you give any type of crypto asset away to another person, other than your spouse or civil partner 
  • Donate any digital assets to charity

Each one of these situations is a taxable event in the eyes of HMRC, and you may have to pay UK tax in the tax year you declare it. 

How much cryptocurrency tax do I have to pay? 

To calculate your tax due, you need to look at each of your cryptocurrency transactions and see what gains, if any, you have made. However, even working out your profits is not always straightforward. For the most part, you would calculate your gain as the difference between what you paid and what you sold it for. If you happen to acquire the asset for nothing, you need to use the market value when you received it to work out your gain. If you sell cryptocurrency within 30 days of buying it, the calculation can be slightly different, which the UK Government website explains comprehensively

You are allowed to deduct certain costs from your gain. That can include the pooled cost of your tokens, as long as that cost considers the rules mentioned above. Other allowable costs are: 

  • Transaction fees incurred before a transaction is added to a blockchain/distributed ledger
  • Any advertising for a buyer or seller 
  • Costs incurred when writing a contract for a transaction
  • Making the valuation that enables you to calculate the gain made in a transaction

Costs you have already submitted and those incurred during mining activities are non-deductible. 

If you find that the total taxable gain you have made is above the annual tax-free allowance (or the Annual Exemption Amount), you will need to pay CGT. If you are a basic-rate taxpayer, you currently pay a 10% tax rate of CGT, rising to 20% if you are a higher-rate payer. The Annual Exempt Amount is £12,300 for the tax year 2021/22 and is to remain the same until the tax year 2025/26. 

What does holding crypto assets mean for your income tax?

No one likes paying tax to HMRC. Yet you must get it right so you are not lumbered with a more enormous bill in the future due to penalties you may incur from not declaring income. While declaring gains made on your crypto transactions may increase your tax bill overall, bear in mind this usually means you are earning more money, too. 

Reducing your tax bill means making the most of the initiatives at your disposal. That means using your ISAs and ability to pay a certain amount into a pension pot each year, amongst others. Again, to ensure that you are not only staying on the right side of the law when it comes to tax, seeking the help of a tax accountant can also allow you to remain tax efficient. Everyone’s situation is different, so there is no one size fits all answer to how much tax you owe on crypto assets or any other type of income you may have. 

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