If you find yourself wondering, “is cryptocurrency taxable?” the short answer is: yes. In most circumstances, HMRC considers crypto to be a taxable asset. However, the type of tax – and the allowances – which apply to your crypto gains depends on a complex and fluid set of definitions established by HMRC, mostly revolving around the types of activities you engage with in order to make money from crypto.
Whether you’re new to the world of cryptoassets or are a veteran trader of cryptocurrencies and NFTs, the rapidly evolving landscape of DeFi (decentralised finance) means that tax laws regulating the market are also changing. This makes it important to regularly refresh your understanding of the UK’s crypto capital gains tax and tax on income generated by cryptoassets. Doing so ensures you maximise your potential profit whilst compliantly paying the right amount of tax.
Our guide to cryptocurrency tax and crypto Capital Gains tax walks you through a veritable minefield of jargon using clear and concise examples, providing you with all of the information you need in order to stay in HMRC’s good books whilst benefiting from your crypto investments.
What is considered a cryptoasset by HMRC?
As you may well already know, there exist a variety of so-called ‘cryptoassets’, with one of the most common being ‘cryptocurrency.’ Popular cryptocurrencies include Bitcoin, Ethereum, and Dogecoin. Non-fungible tokens, or NFTs, are another form of cryptoasset which have been gaining a lot of traction on the DeFi market for the past few years.
In the eyes of HMRC, the type of cryptoasset is less important than its value. Provided it can be bought, sold, gifted, exchanged and/or traded for profit or loss, the cryptoassets you control will most likely be considered taxable. When one of these transactions is completed, HMRC considers the crypto asset ‘disposed of’. Thus, we may also say that almost any disposal of cryptocurrency will be deemed taxable.
There are exceptions to the rule, of course, but typically only in cases where the gains made from disposing of your crypto fall below your personal, Capital Gains, or trading allowance(s).
It is also worth noting that whilst cryptocurrency can function like fiat (that is, government minted) currency, it is not considered a currency by HMRC, but rather as taxable and tradeable shares.
Are all cryptocurrencies and assets considered taxable by HMRC?
Effectively all cryptoassets are deemed taxable by HMRC, yes. However, the question of whether you will be taxed depends on the nature and amount of the gains or losses made, as well as the way in which you invest in crypto.
There are numerous different ways to make gains and losses with crypto – i.e., to ‘dispose’ of cryptoassets – each unique activity governed by a unique set of rules mandated by HMRC. Generally speaking, cryptocurrencies are viewed as ‘assets’ by HMRC, making any tax you pay fall under capital gains, though there are some scenarios in which your crypto would be taxed as income instead.
Below, we examine each of these activities in the context of when and what cryptocurrency tax you should be prepared to pay.
Cryptocurrency tax: When to pay and what to pay
Buying and selling crypto assets
You can think of the act of buying and selling crypto as being a lot like buying and selling shares in a company. The aim for most crypto investors is to buy cryptoassets at a low price and sell them when their value increases in order to make a profit, or ‘gain.’
When you do make a gain on the sale of crypto, you will have to report it to HMRC and pay capital gains tax (CGT) on the profit (calculated by subtracting the value, in £GBP, which you bought the asset for from the value you sold it at).
We’ll discuss just how much CGT you can expect to pay a little later in the article.
On the other hand, if you make a loss when buying and selling cryptocurrency, then you can claim this against your gains, thus potentially minimising your end-of-financial-year capital gains tax bill.
Trading crypto assets
Generally speaking, buying and selling cryptocurrency is unlikely to be viewed by HMRC as you ‘trading’ in these assets (i.e., making a taxable business income from the activity). However, depending on how you conduct your buying and selling it is worth being aware of HMRC’s definition of a ‘trader,’ as triggered by its ‘badges of trade.’
In short, to fall into the definition of ‘trading’ you would need to demonstrate a high degree of organisation, sophistication, profit-making intention, and trade with great regularity and frequency, such that your buying and selling of cryptocurrencies amounted to a financial trade.
In the unlikely event that your dealings in crypto would mark you as a trader in the eyes of HMRC, you would need to report your trading as income tax (rather than capital gains) via a Self-Assessment Tax Return.
Receiving cryptocurrency as income
Occasionally you may find that an employer or client opts to pay your wages or invoices in cryptocurrency. With the proviso that these cryptoassets can be readily exchanged for fiat cash (e.g., Ethereum or Bitcoin), then you will need to pay both income tax and National Insurance (NI) on the value of the assets, in £GBP, at the time of receipt. Your employer would typically be the party responsible for making these deductions/withholdings on your behalf.
However, in circumstances where the cryptoassets you receive as income are not readily exchangeable for cash, then you would not typically be required to pay National Insurance. Instead, your employer would be obligated to deduct the appropriate tax from you via PAYE or a P11D form.
Inheriting crypto
Given crypto is most commonly considered a tradeable asset by HMRC, any cryptocurrency you inherit would be taxed as ‘property’ under inheritance tax law.
Mining crypto
To create cryptocurrencies requires a great deal of computing power in order to generate entirely unique blockchain assets. The creative process is known as ‘mining,’ or ‘crypto mining.’
Mining cryptocurrency is typically also subject to tax, since the assets you generate will tend to have a value greater than the resources required to make them.
Depending on how serious a mining operation you control, crypto mining profits will either be treated as business income or miscellaneous income.
Business mining
If your cryptocurrency mining operation has the hallmarks of a business (measured by your level of organisation, degree of risk and activity, and commerciality) then the value of your cryptoassets upon point of receipt will count toward your business income and so be taxed as trading profits.
The key here is to keep clear and accurate records of the value of assets from the time of acquisition as well as at the point of trade or sale. The difference between these two values marks your trading gain or loss.
Hobby mining
On the other hand, if crypto mining serves as a hobby only (i.e., is not organised, risky, active or commercial enough to be considered a trade), then any profit you make should be reported and taxed as miscellaneous income with HMRC. Similarly, any rewards or fees given to you in exchange for the crypto-mining you perform shall be added to your taxable miscellaneous income. Reasonable expenses may be deducted from this income before paying tax on it.
Staking crypto
‘Staking’ describes a crypto-specific activity by which you ‘lock up’ your cryptoassets – thereby preventing their sale for a set period of time – in order to help drive up the value of a wider pool of assets. In doing so, you generate interest on the value of your assets. In many senses staking crypto works like investing in a lifetime ISA (LISA), where you earn higher interest rates in exchange for revoking (or limiting) your own access to the investment.
HMRC would typically treat interest earned as miscellaneous income for tax purposes, though it can also sometimes be considered personal savings income or, if disposed of at a later date, capital gains. Given the fluid nature of the tax which applies to gains made from staking, we highly recommend seeking the advice of a personal tax advisor before filing your self-assessment form.
Cryptocurrency tax: How much to pay
As outlined above, depending on the activity by which you generate income or profit from cryptocurrency, you will owe HMRC either capital gains tax or income tax.
Crypto income tax
Income tax is most commonly applied to crypto traders and any crypto disposal which meets the definitions of trade established by HMRC.
Income tax will be applied to your net crypto profits according to your income tax band: normal rate taxpayers will pay 20% tax on crypto income, higher rate taxpayers 40%, and additional rate taxpayers 45%. National insurance will be taxed at 10% and 2%.
Cryptocurrency income should be counted alongside your other sources of income when calculating your income bracket, with your personal annual tax-free income allowance of £12,570 applying to the full total.
Crypto Capital Gains tax
Most often you will find that your crypto buying, holding, and selling activities fall under the definition of an ‘investment activity’ in the eyes of HMRC, and will therefore be subject to capital gains tax (CGT).
Individual crypto investors have an annual tax-free allowance of £6,000. Any gains made from crypto over and above £6,000 will be taxed at 10% up to the basic rate tax band, and at 20% in higher and additional tax bands.
Cryptocurrency tax exemptions
There are a small number of exceptions which exempt you from having to pay tax on cryptocurrency, though it is advisable to seek professional tax advice even if you are confident that your crypto investments or trades should be tax-exempt.
- If you receive a cryptoasset via airdrop beyond a trade or business deal, and without having done anything or given anything in exchange, then income tax will not normally apply to this asset’s value. However, gains made upon the disposal of an airdrop-received asset would still be covered by CGT.
- ‘HODL’ing cryptocurrency (HODL stands for ‘Hold On For Dear Life’), whereby you retain possession of cryptocurrency for as long as possible, is typically exempt from CGT and income tax.
- Transferring assets and DeFi currency between two or more digital ‘wallets’ which you own will not be considered a taxable trade by HMRC.
- Buying cryptocurrencies using a fiat currency like £GBP or $USD is not typically deemed a taxable activity.
- Giving your spouse cryptocurrency or cryptoassets as a gift is not typically taxable.
Cryptocurrency tax: Where to pay your crypto tax bill
You must pay tax on crypto investments, trades, and gains to HMRC, but where and when you do this depends on whether you are paying CGT or income tax or both.
If paying capital gains tax on your crypto profits, then you can report your earnings one of two ways: by filling in a Self-Assessment Tax Return and filing it by HMRC’s annual deadline of January 31st (for electronic submissions), or by reporting your taxable gains via HMRC’s real-time CGT service.
If paying income tax on crypto trading, however, you can only pay your tax bill by filling out a self-assessment tax return each year.
Fundamental to compliantly paying and reporting your cryptocurrency tax to HMRC is quality, accurate and regular record-keeping. This is especially true given the potentially high and quick returns you may make through crypto disposal.
HMRC recommends you keep clear records of the following, as this information will be asked of you when filing your taxes:
- Type of assets you’ve traded in
- The date you disposed of each asset
- The number of assets you dispose of
- The number of assets still in your possession
- The value of the assets at time of acquisition, in £GBP
- The value of the assets at time of disposal, in £GBP
- Your bank statements
- The digital address(es) of your crypto wallet(s)
- Records of ‘pooled costs’ both before and after you dispose of your cryptoassets
How to better manage your cryptocurrency investments with the help of a tax professional
As we’re sure has become abundantly clear, the ever-evolving world of cryptoassets and UK tax law makes managing and paying the right amount of cryptocurrency tax quite complicated. It is our hope that this guide has made the subject much easier to grasp, but if you find yourself still concerned about your own crypto-tax status in the eyes of the UK’s tax authority, then please don’t hesitate to reach out to the team here at UWM. With over 40 years of experience helping individuals and businesses to optimise their tax bills, we can help in turn to make your cryptoassets work harder and go farther, whilst making the process of paying your cryptocurrency tax bill a breeze. Discover more by browsing the services we offer, from personal tax accountancy and business tax planning to help file your self-assessment tax returns.
