Chat with us, powered by LiveChat Do you have to pay taxes on cryptocurrency in the UK?

Do you have to pay taxes on cryptocurrency in the UK?

Do you have to pay taxes on cryptocurrency in the UK?
Table of Contents
    Add a header to begin generating the table of contents

    A cryptocurrency is a digital/virtual currency secured by cryptography, making it nearly impossible to spend twice or counterfeit. The best-known cryptocurrencies are Bitcoin, Ethereum, Litecoin, and Tether.

    If there is a defining feature of cryptocurrencies, it is that they are decentralised digital currencies that do not rely on banks or central authorities to record transactions and issue new units. This feature renders them theoretically immune to government interference or manipulation.

    We are cryptocurrency accountants, who can help with your tax planning, tax treatment, and other matters related to cryptocurrencies.

    What determines taxation on cryptocurrency?

    Many people trade with cryptocurrency, considering it as an investment. This means HMRC views them as assets as it doesn’t recognise them as currency or money.

    In 2018, HMRC issued guidance on wrapping the existing tax code around cryptocurrency. It is a guide that outlines how cryptocurrencies are not considered currency or money but assets.

    This advice has been updated several times since 2018, and in March 2021, HMRC compiled its advice into a manual.

    As an individual, you need to check if you need to pay tax when you:

    • Dispose of crypto-assets.
    • Receive crypto-assets.

    Disposal of crypto-assets

    If you were to buy and dispose of cryptocurrency as a personal investment, you’d pay Capital Gains Tax on the profits you make.

    HMRC refers to cryptocurrency units as tokens and considers you have disposed of a token if you:

    • Sell it
    • Exchange it for a different type of token
    • Use it to pay for goods or services
    • Give it away to another person – unless it’s a gift to your spouse or civil partner.

    Receipt of crypto-assets

    Any tokens/cryptocurrency you receive from employment or mining will be considered income. If you receive tokens/crypto as income, you’ll need to keep records and may need to pay Income Tax and National Insurance Contributions. You do not need to pay tax on tokens/crypto when you buy them.

    However, if you have received tokens/crypto from mining and are not trading, the tokens will be treated as other taxable income. You will need to complete a Self Assessment tax return in pounds sterling unless you’ve received crypto assets worth less than £1,000 or below £2,500 from other untaxed income.

    If an employer pays you in tokens/crypto, you need to check if those tokens are classed as readily convertible assets (an asset that can be easily exchanged for cash). If that income is considered a readily convertible asset, UK employers must pay your Income Tax and National Insurance Contributions through PAYE before they pay you.

    If they pay you in tokens/crypto, they should estimate their value and pay Income Tax and National Insurance Contributions based on the value estimate. Your employer will pay Income Tax on your behalf, regardless of whether you’re paid in tokens or in Sterling Pounds.

    However, If your income is not a readily convertible asset, you should ask your employer if they have paid your Income Tax through PAYE or not. If they have not, you will need to pay it yourself. In order to pay your Income Tax, complete a Self Assessment tax return in pounds sterling.

    How to work out Capital Gains Tax for cryptocurrencies

    The gain is usually the difference between the purchase and selling figures. The Capital Gains Tax rates for disposing of cryptocurrencies is tax-free for everyone for the first £12,300. If you pay a higher rate of income tax, you’ll pay a flat fee of 20% on gains.

    If you pay basic-rate income tax, Capital Gains Taxes depend on how much you’ve earned. In order to work out how much you need to pay, take your total taxable gains and deduct your tax-free allowance of £12,300. You’ll pay 10% on gains within the basic income tax bracket and 20% tax on figures greater than that.

    There are some specific cryptocurrency allowable costs’ that you can deduct from your cryptocurrency gain. They are:

    • The transaction fees are paid before the transaction is added to a blockchain
    • Advertising for a buyer or seller
    • Drawing up a contract for the transaction
    • A valuation that helps you work out your gain for that transaction

    You can’t deduct costs if you’ve already done so against profits for income tax or the cost of mining activities, e.g., equipment, electricity, etc.

    It is also important to get to grips with HMRC’s ‘pooling’ concept. While HMRC says that this ultimately makes the Capital Gains Tax calculations easier, it could be a complex topic as well.

    When calculating your gain, you organise each type of token into a pool, which is what you will need to do for regular investments in a single company. But you don’t need to organise the tokens into different pools if you buy them on the same day that you sell those tokens of the same type or within 30 days of selling tokens of the same type.

    How to pay tax on cryptocurrency UK

    You have to report gains on cryptocurrency on your annual Self Assessment tax return, or you can use HMRC’s real-time Capital Gains Tax reporting service.

    In the UK, tax season starts on April 6 and runs until April 5 of the following year, and the tax return is to be submitted by January 31 of the next year. As usual, it is important to keep accurate records of your taxes, which include your cryptocurrency activity. 

    As per HMRC, you have to keep the following information for cryptocurrency activities:

    • Type of tokens.
    • The date you disposed of them.
    • The number of tokens you’ve disposed of.
    • The number of tokens you have left.
    • Value of the tokens in pounds sterling.
    • Bank statements and wallet addresses.
    • Records of the pooled costs before and after you disposed of them.

    What happens if you buy and trade cryptocurrency as part of your business?

    So far, what we’ve discussed applies to the assessment of taxpayers who purchase and dispose of cryptocurrency as individuals.

    However, there are some businesses and companies that may be carrying out activities involving cryptocurrencies:

    • Trading exchange tokens.
    • Exchanging tokens for other assets (including other types of crypto assets).
    • ‘Mining’ – the complex process by which new units enter circulation.
    • Providing goods and services in return for exchange tokens.

    If your business is involved in any of these, various taxes may apply, as follows

    • Capital Gains Tax.
    • Corporation Tax.
    • Corporation Tax on Chargeable Gains (CTCG).
    • Income Tax.
    • National Insurance.
    • VAT.

    You will have to report tax on your self-sssessment tax return or your company tax return. At WIS Accountancy, we are specialist cryptocurrency accountants. Please contact us today, and we can help you.

    *HMRC’s detailed crypto-assets manual has more on the tax treatment of business activities that involve cryptocurrency

    Share This Post

    Request a Callback

    Request a Free Accounting Quote

    Would you like an accounting quote based on your requirements and business? Click on the button below and complete the form to get an accounting quote sent through to you.

    We’re available Monday to Friday (9am – 5pm)