More and more people are buying and selling cryptocurrency. It’s exciting, but it’s important to understand the tax rules. If you don’t, you could end up paying more money than you need to.
This guide will help you understand how taxes work with cryptocurrency. We’ll explain what you need to pay tax on, how much tax you might owe, and how to make sure you’re doing everything right.
Whether you’re a beginner or have been trading for a while, this information should come in handy!
This guide covers:
- What is cryptocurrency tax in the UK?
- Paying tax on selling your crypto
- Getting paid in crypto: income tax
- How can you save on your crypto tax bill?
- Common mistakes people make with crypto tax
What is crypto tax in the UK?
Cryptocurrency, like Bitcoin or Ethereum, are all around us. But with this popularity comes the task of understanding how it all fits into the UK tax system.
Unlike traditional currencies, the UK government treats cryptocurrency as a form of property. This means there are specific rules about when and how you might need to pay tax on it.
When do you pay tax on cryptocurrency?
You generally need to pay tax when you:
- Sell your cryptocurrency: This means swapping your Bitcoin for GBP £££.
- Exchange one cryptocurrency for another: Even if you’re not getting ‘real’ money, swapping one type of crypto for another can trigger a tax event.
- Spend your cryptocurrency: Using your crypto to buy something is seen as similar to selling it, so you might owe tax on any profit.
- Earn cryptocurrency: If you get crypto as payment for a job or by ‘mining’ it, you might need to pay income tax on it.
What kind of taxes are there?
There are two main types of tax that could apply to your cryptocurrency:
- Capital Gains Tax (CGT): This is usually when you sell your cryptocurrency for a profit.
- Income Tax: This is if you get cryptocurrency as payment for something.
It’s important to understand the difference between these two because they’re calculated and reported differently.
Paying tax on selling your crypto
If you sell your cryptocurrency for more money than you paid for it, you might need to pay Capital Gains Tax (CGT). This is the tax on money you make when you sell something that’s worth more than when you bought it.
To figure out how much tax you owe, you need to know:
- How much your crypto cost: This includes what you paid for it and any extra fees.
- How much you sold it for: This is the money you got when you sold your crypto.
- Your annual allowance: There’s a certain amount of money you can make each year without paying CGT.
You subtract what your crypto cost from what you sold it for. This is your profit. If you make more than your annual allowance, you might need to pay CGT.
It’s important to keep track of everything you buy and sell. You need to tell that pesky tax man (HMRC) about any money you make from selling crypto.
Getting paid in crypto: income tax
If you get cryptocurrency instead of regular money, you might need to pay Income Tax. This happens when:
- You’re paid in crypto for a job: If you’re a freelancer or work for a company that pays you in cryptocurrency, you need to pay tax on it.
- You earn crypto through mining: If you use computers to create new cryptocurrency, the money you make is considered income.
- You get free crypto: Sometimes, you might get free cryptocurrency (called an airdrop). This might also be considered income.
To figure out how much tax you owe, you need to know how much your cryptocurrency was worth when you got it. You add this to your other income to see what tax rate you pay.
How can you save on your crypto tax bill?
There are a few ways to potentially reduce the amount of tax you owe on your cryptocurrency:
Annual allowance
Everyone gets a certain amount of money they can make each year without paying tax on it. This is called your ‘annual allowance’. For cryptocurrency, this is the same as for other things you might sell, like shares. If you make less than this amount in profit from selling crypto, you won’t owe any tax.
Offset your losses
If you lose money on one cryptocurrency, you can use that loss to reduce the tax you pay on the money you made on another one. This is called offsetting your losses.
Special tax breaks
There are some special tax breaks for investing in certain types of businesses, including some that deal with cryptocurrency. These can be complicated, so it’s usually a good idea to talk to a tax expert if you think they might apply to you. Hey, why not even join our community of Crypto Tax Degens for access to one of the brightest minds in the crypto tax space?
Common mistakes people make with crypto tax
It’s easy to make mistakes when you’re working out your crypto taxes. Here are some things to watch out for:
- Forgetting about things: It’s easy to forget about all the different things you’ve done with your crypto. You need to keep track of everything, even if you don’t think it’s important.
- Not knowing what counts as selling: You might think you haven’t sold your crypto if you’ve swapped it for another one or used it to buy something. But these things can also mean you need to pay tax.
- Missing deadlines: It’s important to know when you need to tell the tax office about your crypto. If you’re late, you might have to pay a fine.
By being careful and keeping good records, you can avoid making these mistakes.
Wrapping up on crypto taxes
That was a whistle-stop tour of the basics of crypto tax, but there is lots more to learn. If you’re looking for more professional crypto tax advice or have specific questions about your situation, join the Crypto Tax Degens community. Here, you’ll gain access to exclusive insights from crypto tax experts and stay ahead of the latest developments in the UK’s evolving tax landscape. Don’t let tax worries hold you back!
Connect with a UK tax advisor today.