Lots of people are buying and selling cryptocurrency these days. And, it’s no surprise! It can be really exciting, but it’s also important to understand the tax rules. If you don’t know how taxes work with crypto, you could end up paying more money than you need to. No one needs that.
This article will help you understand crypto taxes better. We’ll talk about the basics, how to save money on taxes, and what to do with new things like DeFi and NFTs.
By the end, you’ll feel more confident about your crypto and taxes.
Understanding crypto taxes
What counts as taxable?
When you buy and sell cryptocurrency, certain things can mean you have to pay a teeny tiny bit of tax (or a lot… unfortunately.) Here are some examples:
- If you sell your Bitcoin for GBP, you might need to pay tax on the money you make.
- Even if you don’t get regular money, swapping Bitcoin for Ethereum can also mean you have to pay tax.
- Using your crypto to buy something is a bit like selling it, so you might need to pay tax on the difference between what you paid for it and what it’s worth now.
- If you get crypto for doing something, like mining or being part of a cryptocurrency project, you might need to pay tax on that, too.
Important words to know
To understand crypto taxes, familiarise yourself with these special terms.
- Capital Gains (CGT): This is the money you make when you sell something for more than you paid for it. You might have to pay tax on your capital gains from crypto.
- Income Tax: If you get crypto as payment for something, it’s usually considered income, and you might need to pay income tax on it.
- Allowable Costs: These are things you can subtract from the money you’ve made, which can help you pay less tax. For example, you might be able to subtract the fees you paid when you bought or sold crypto.
What are the tax rules?
The government thinks of cryptocurrency as something you own, not like regular money. This means different rules apply. You might need to pay capital gains tax on money you make from buying and selling crypto, and income tax if you get crypto as payment for something.
Keeping track of everything
Keep a record of everything you do with your cryptocurrency! This is super key. Write down:
- When you bought or sold crypto
- How much you paid or got
- Any fees you had to pay
- How much your crypto was worth at different times
This information will help you work out how much tax you owe. And try and store this info in a private place. You don’t want it getting into the wrong hands.
Strategies to cut down your crypto taxes
1. Using allowable losses
One of the very best ways to cut down your crypto tax liability is by offsetting your gains with any losses you’ve incurred.
In the UK, if you sell or dispose of a cryptocurrency at a loss, you can use that loss to offset gains from other crypto or non-crypto assets, cutting down your overall capital gains tax.
This process is known as “tax-loss harvesting.” But as we mentioned earlier, you absolutely have to keep detailed records of all transactions, including losses, as these can significantly lower your tax bill when reported correctly – emphasis on correctly.
For example, if you make a £10,000 gain on one crypto asset but lose £3,000 on another, you can offset the gain with the loss, meaning you’ll only pay tax on £7,000. Keeping track of these losses and reporting them accurately means you’re not paying more tax than necessary.
2. Tax-advantaged accounts
While cryptocurrencies are not directly held within traditional tax-advantaged accounts like ISAs, there are still strategic ways to use these accounts to cut your taxes on your related investments. For example, you might consider holding crypto-related stocks or funds within an ISA, where gains are protected from CGT.
3. Timing of transactions
The timing of your crypto transactions can have a fair impact on your tax liability. In the UK, the length of time you hold a cryptocurrency before selling it affects the calculation of your CGT. Although we don’t have separate rates for short-term and long-term capital gains like in the US, strategic timing can still play a nice role, especially in managing your tax brackets and allowances.
For example, if you’re nearing the end of the tax year and close to exceeding your capital gains tax allowance, it might be beneficial to delay a sale until the new tax year begins, allowing you to use a fresh annual allowance.
In the same breath, spreading out the sale of assets over multiple tax years can help you stay within lower tax brackets and avoid higher rates of taxation.
Navigating DeFi and NFTs
DeFi transactions
Decentralised Finance (DeFi) has introduced a variety of new opportunities and complexities for crypto traders. Activities such as staking, lending, and yield farming can each have unique tax implications.
- Staking Rewards: If you earn rewards from staking, these are typically considered income and subject to income tax at the time of receipt, based on the market value of the tokens.
- Lending and Yield Farming: Interest or rewards earned through lending or yield farming are also taxable as income. The value of these rewards needs to be recorded at the time they are received.
The complexity of DeFi transactions often means that each event (e.g., moving assets in and out of liquidity pools) needs careful documentation, as each can potentially be a taxable event.
NFT taxation
The rise of Non-Fungible Tokens (NFTs) has brought about some extra tax considerations. Whether you’re an artist creating and selling NFTs or a collector trading them, each transaction can trigger a taxable event.
- Creating and Selling NFTs: If you create and sell an NFT, the proceeds are typically considered income, and you’ll need to pay income tax on the value received at the time of the sale.
- Buying and Selling NFTs: When you sell an NFT, any profit made is subject to capital gains tax. If you use cryptocurrency to purchase an NFT, the act of spending the crypto could also be a taxable event, depending on whether the value of the crypto has increased since you acquired it.
Common mistakes
Many traders and investors make mistakes when trading DeFi and NFTs – Some common pitfalls include:
- Failing to report income: Not recognising staking rewards or yield farming returns as taxable income can lead to underreporting and potential fines.
- Ignoring transaction fees: When calculating gains or losses, it’s important to factor in transaction fees, as they can be deducted from your taxable gains.
- Inadequate Record-Keeping: Like always, the complexity of DeFi and NFT transactions requires really detailed records. Without accurate documentation, it can be hard to work out your tax obligations accurately.
Avoiding these pitfalls involves staying informed about the latest tax regulations and ensuring that every transaction is thoroughly documented and correctly reported.
What should I avoid if I start trading Crypto?
In order to stay on top of your taxes when you start trading crypto, you need to stay on top of your trades. Avoid being lazy and disorganised and it should make navigating crypto tax a lot easier. If you need expert crypto tax advice from the GOAT of crypto tax, check out Andy Wood’s eBook here.
The best tax advice for crypto traders from our community
At Crypto Tax Degens, we specialise in educational crypto tax for cryptocurrency traders and investors in the UK. Whether you’re new to crypto or a seasoned trader, our community can help you understand your tax obligations, optimise your tax strategy, and stay compliant with HMRC.
By joining our community, you’ll gain access to exclusive insights, personalised advice, and the peace of mind that comes with knowing your crypto taxes are in expert hands.
If you would rather get professional help, please visit our crypto tax consultant page and leave us a message.