Over the past several years, and especially in 2021, cryptocurrencies have become a significant factor in the financial world. More and more people are buying digital currencies either as an investment opportunity or in the hopes of protecting their assets. However, with this sudden jump in popularity, cryptos have also entered authorities’ crosshairs. Many have started introducing bills in the hopes of taxing and regulating cryptocurrencies and digital assets. One of the first was the United Kingdom, which outlined a clear policy on taxation. This has left many investors wondering what the current situation with the crypto tax in the UK is.
As a relatively new form of currency, cryptos are very loosely regulated. Governments all over the world are introducing new bills in the hopes of keeping a reign on the multi-billion dollar market. However, their efforts have been fairly delayed, and they are now playing catch up to a sector that keeps moving at an exponential rate.
Most jurisdictions currently treat cryptocurrencies the same way as other tradeable assets or properties. This means that upon sale, cryptos incur a capital gains tax. The rate for this will usually vary from country to country.
Another important factor is whether you are acting as an individual or a company. Because different laws and regulations apply for the two entities, the taxation rate is also different. As a result, many investors will choose to keep their cryptos in holding vehicles for tax purposes. This practice has been commonplace for many other assets over the years, and it is no surprise that it has made its way over to crypto.
Does The UK Tax Crypto?
In general, the UK taxes crypto with both capital gains and income taxes. Which one is applied depends on how you are earning your assets.
In December of 2018, the United Kingdom government published a detailed manual on HMRC’s stance on cryptocurrencies. The document was among the first of its kind and provided information on how the country would regulate and tax crypto assets. This has been supplemented with additional clauses over the years as the technology continues to evolve.
Currently, in the eyes of HMRC, cryptocurrencies are currencies only in name. Instead, the tax authority puts cryptos in the same group as properties. This means that it taxes crypto assets and income from them the same way that it treats stocks or other commodities.
UK Capital Gains Tax On Crypto
The government will apply capital gains tax on any profits you make from investments in crypto. This means that if you buy cryptocurrencies and they appreciate in value, that increase will be subject to a tax when you decide to sell.
In fact, any transaction in which you are disposing of your cryptocurrency will trigger a capital gains tax. This includes trading it for other cryptocurrencies, using it to make purchases, or even giving it away. An exception here are cases where you are gifting cryptos to your spouse or civil partner. This is the same rule that applies to all capital assets.
Additionally, as is the case with other capital gains taxes in the country, you have a yearly allowance that is exempt from taxation. In the UK, this is set at £12,300. If your capital gains for the year are below this amount, you will not have to pay taxes on them.
Are All Capital Gains From Crypto Taxed The Same?
No, capital taxes on crypto in the UK depend on your income band. The capital tax rate will vary based on your annual taxable income. If this is below £50,270, you will fall under the basic band, and your tax rate will be 10%. For those in the higher tax band of up to £150,000, the rate is 20%. There is another band for those with an annual income above £150,000, but that is also subject to the same 20% tax rate.
Additionally, the UK does not have any tax incentives or exceptions for long-term investments. This means that you will have to pay the same rates, regardless of how long you have held onto your crypto.
How Is Capital Gains Tax Calculated For Cryptos In The UK
HMRC calculates capital gains tax for crypto in the UK in the same way as for all other applicable assets. As we mentioned, there are three different bands with two different tax rates. These are applied to any capital gain you have accrued over the £12,300 allowance.
In order to calculate your capital gain, you need to subtract the cost basis from the gross income. In this case, the cost basis is the price at which you acquired the crypto. Essentially, the capital gain is the difference between the price at which you bought and the price at which you sold. If this is a negative value, you will have accrued a capital loss.
Deducting Capital Losses On Cryptos In The UK
In the UK, taxpayers can deduct any capital losses accrued from cryptocurrencies from their yearly return. Additionally, there is no ceiling on how much you can deduct. This means that if you have lost enough capital, you can go under the maximum annual allowance of £12,300 and not need to pay any capital gains taxes.
Furthermore, once you have gone below that £12,300 mark, you can carry over any leftover losses into the next fiscal year. However, do be aware that capital losses in the UK are only valid for four years.
In order to calculate your capital losses, you need to go through the same process as for gains. You need to subtract the cost basis of the crypto from the price that you sold it at. The only exception here is that the value you get at the end will be negative.
Does Stolen Crypto Count As Capital Loss In The UK?
No, HMRC does not consider stolen crypto to be a capital loss. As such, you cannot use it to deduct from your annual income. However, if you lost the crypto in a scam, you can file a negligible value claim. This can later be claimed as a capital loss. Examples include buying from an exchange and not receiving the currency or Ponzi schemes. However, make sure to consult with a financial advisor first to make sure that you qualify for such a claim.
A negligible value claim in the UK can be filed when an asset you possess becomes of negligible value. If this has not been properly disposed of in the eyes of the authorities, it will still be owned by you and cannot be declared as a capital loss. Such is the case with the abovementioned scenarios of theft or fraud. While the original owner of an asset has lost possession of it due to theft, they still retain the title to it. This means that if it is recovered by authorities, it will be returned to the original owner.
UK Income Tax On Crypto
As we mentioned at the beginning of the article, HMRC also applies income tax to crypto profits. However, this only occurs under certain conditions. These will usually be examples of earning the currency in exchange for goods and services, rather than it appreciating in value while owning it.
Whenever crypto is treated as income in the UK, it will be taxed under the same four bands that apply for all other sources of regular income. This means that any income under £12,570 is free of taxation. Income up to £50,270 is taxed under a 20% rate, while income up to £150,000 accrues a 40% rate. Lastly, anything above £150,000 will be taxed with a 45% rate.
However, it is important to clear up that the latter three taxation rates are applied to any income you have accrued over the £12,570 personal allowance. That means that if you have an annual income of £50,000, only £37,430 will be taxed. Do be mindful that when determining your income band, you will need to take into account all of your sources of income. This includes wages, salaries, crypto income, and all other streams that qualify as income.
What Qualifies As Crypto Income In The UK?
Whether you are receiving cryptos as payment, earning them, or participating in programs that award them, the UK government will apply an income tax on your assets. HMRC has set clear guidelines on what it views as crypto income. This includes the following sources of cryptocurrencies:
- Receiving crypto payments
- Mining crypto without selling on the same day
- Receiving crypto as payment for validating transactions
- Receiving crypto in exchange for staking your own on a platform
- Lening crypto in exchange for interest
- Referral bonus systems
- Play-to-earn video games
- Various programs that provide crypto as an incentive for performing tasks
- Trading in crypto
While some of these are not explicitly mentioned in the commission’s guidelines, it can safely be assumed that they fall under the same rule. This is because they are so similar in nature and operation.
It is also worth mentioning that while trading in crypto can incur an income tax, it does so only in very specific cases. In order to qualify as income, crypto trading has to be consistently large in volume over a period of time and at a high frequency. If these requirements are met, then it falls under the trading qualification.
Do You Have To Pay Inheritance Tax On Crypto In The UK?
Since HMRC considers crypto assets the same as property, they are subject to an inheritance tax like any other asset. In the UK, the standard is 40%. This can be lowered to 36% on some assets if 10% of the net value of the estate is donated to charity. As a rule, estates under £325,000 are not subject to an inheritance tax in the United Kingdom. However, anything above that threshold is subject to the 40% rate.
In order to calculate inheritance tax, you will need to subtract the minimum allowance threshold from the total worth of the estate. The resulting value is the taxable amount. This means that if an estate is worth £500,000, then that £175,000 that is over the threshold will be subject to a 40% inheritance tax.
The government also offers a 100% inheritance tax relief if the estate is left to a spouse residing in the United Kingdom. This applies to all assets, including crypto. Another bonus for spouses and civil partners is the transfer of unused threshold allowances. If a person’s estate is below the £325,000 mark, any remaining amount can be added to their surviving spouse’s threshold in order to increase it.
Can The UK Goverment Track Crypto Assets For Tax Purposes?
Yes, the UK government and HMRC coordinate with multiple exchanges to monitor and track transactions. While HMRC has specifically named Coinbase, eToro, and CEX as platforms that it monitors, it likely also does the same for most major marketplaces and exchanges that operate in the country. If a business is registered by the UK’s FCA, then it is almost certainly monitored by HMRC. These include Binance, Crypto.com, Kraken, KuCoin, Gemini, CoinJar, Gate.io, and Bittrex.
In such cases, the authorities will receive information on users through the Know Your Customer (KYC) system. This ties transactions and assets to citizens who can be easily identified. Furthermore, many exchanges will hand over data on any customers who exceed £5,000 in transactions.
As one of the first countries to address the issue, the UK has pretty clear tax policies on crypto-assets. In 2018, the local HMRC published a dedicated manual on crypto-asset taxation. Since then, this has been supplemented several times to accommodate changes and developments in the sector. In general, the authorities in the UK view crypto-assets as property, and so they are subject to many of the same laws.
At present, both capital gains tax and income tax can be applied to profits from crypto. Which one applies depends on the source and nature of your profit. The former is usually applied to income from investing in, buying, and selling crypto-assets. Meanwhile, the latter is more widely applied to those who earn currencies through different means like mining or receiving them as payment.
Whatever the source and amount of the crypto that you have acquired may be, it is always smart to acquaint oneself with the pertinent tax policies. Failing to properly declare your holdings can quickly land you in hot water with the taxman and incur steep penalties.