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

3-minute read

Sam Bromley

23 December 2021

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HMRC applies tax on cryptocurrency, so you need to know how to report it on your Self Assessment.

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Cryptocurrencies are decentralised digital currencies that don’t rely on banks or central authorities to record transactions and issue new units.

Transactions are recorded through distributed ledger technology (the best known of which is blockchain). This prevents a unit from being used twice and enables data to be shared globally.

The best-known cryptocurrencies are Bitcoin, Ethereum and Litecoin.

Many people buy and sell cryptocurrency as an investment. This means that HMRC views them as assets (it doesn’t recognise them as currency or money) and you’ll need to pay tax on the profit you make.

But because the market is new, the rules around tax on cryptocurrency have been evolving rapidly.

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

If you buy and ‘dispose’ of cryptocurrency as a personal investment, you’ll pay capital gains tax on the profits you make.

HMRC refers to cryptocurrency units as tokens. It says that disposal is a broad term that includes:

  • selling tokens for money
  • exchanging tokens for a different type of token
  • using tokens to pay for goods or services
  • giving away tokens to another person (unless it’s a gift to a spouse or civil partner)

The capital gains tax rates for disposing cryptocurrencies are:

  • 20 per cent for higher and additional rate taxpayers
  • 10 per cent for basic rate taxpayers (but this depends on your overall taxable income, the size of the gain, and your deducted allowances, as you’ll pay 20 per cent on any amount above the basic tax rate)

The tax-free allowance for capital gains tax is £12,300.

Working out whether you need to pay tax on cryptocurrency

Your gain is usually the difference between how much you paid for an asset and what you sold it for. You pay capital gains tax on your gains above the tax-free allowance.

There are some cryptocurrency-specific ‘allowable costs’ that you can deduct from your gain, including:

  • transaction fees paid before the transaction is added to a blockchain
  • advertising for a buyer or seller
  • drawing up a contract for the transaction
  • 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 for the cost of mining activities (like equipment or electricity).

It’s also important to get to grips with HMRC’s ‘pooling’ concept. While HMRC says that this ultimately makes for easier capital gains tax calculations, it can be a complex topic.

When working out your gain, you group each type of token into a pool, which is also what you need to do for regular investments in a single company.

But you don’t group tokens into pools if you buy them on the same day that you sell tokens of the same type, or within 30 days of selling tokens of the same type.

Find out more about cryptocurrency pooling and capital gains tax in HMRC’s manual.

How to pay tax on cryptocurrency UK

You report gains on cryptocurrency on your annual Self Assessment tax return.

You can also use HMRC’s real-time capital gains tax reporting service. Remember that gains are reported in pound sterling.

As usual, it’s important to keep accurate records for your taxes, which includes your cryptocurrency activity too. HMRC says this means the:

  • type of tokens
  • date you disposed of them
  • number of tokens you’ve disposed of
  • number of tokens you have left
  • value of the tokens in pound sterling
  • bank statements and wallet addresses
  • records of the pooled costs before and after you disposed of them

If you’re not sure about anything, speak to HMRC or a professional adviser.

What if I buy and trade cryptocurrency as part of my business?

The above information is for Self Assessment taxpayers who buy and dispose of cryptocurrency as an individual.

However, some businesses and companies may be carrying out activities involving cryptocurrencies, including:

  • buying and selling exchange tokens
  • exchanging tokens for other assets (including other types of cryptoassets)
  • ‘mining’ (the complex process by which new units enter circulation)
  • providing goods or services in return for exchange tokens

If your business does any of these, various taxes may apply, including:

You’ll have to report tax on your Self Assessment tax return or your company tax return.

HMRC’s detailed cryptoassets manual has more on the tax treatment of business activities that involve cryptocurrency.

But as this is a complex topic, it may be best to get professional advice.

Would you like us to write about any other cryptocurrency topics? Let us know in the comments below.

Photograph 1: Africa Studio / stock.adobe.com/uk

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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