More and more people are buying, selling, and trading cryptocurrencies, there is no denying that… But not all of them know you need to pay tax on your crypto assets.
That’s why we are here. This guide will help you figure everything out, from working out if you need to pay tax in the first place, to helping you to understand how to calculate your gains. We’ll also explain the UK tax laws so you can understand how they apply to you and your assets.
Ready? Let’s start with the basics…
This guide covers:
What is Cryptocurrency?
You may already know this but sometimes it is helpful to start from the beginning. Cryptocurrency is a type of digital money that uses special codes (called cryptography) to keep it secure. Unlike regular money, cryptocurrency doesn’t have a physical coin or bill. Instead, it exists only online.
Cryptocurrencies use something called blockchain to record transactions. This is like a digital diary that everyone can see, but no one can change. This makes it very hard for anyone to cheat or fake money.
Some popular cryptocurrencies are:
- Bitcoin: This is the first and most famous cryptocurrency. People often call it “digital gold.”
- Ethereum: This is used to build apps and other digital things.
- NFTs: These are special digital items that prove you own something unique, like a piece of art or a music track.
You definitely need to know that in the UK, cryptocurrency is treated like other types of property, a bit like stocks or houses. This means you might have to pay tax if you sell or trade it. It’s important to understand this so you know what taxes you need to pay.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax imposed by the UK government on the profit you make when you sell an asset that has increased in value. This asset can be anything from a property to shares, and, importantly, it includes cryptocurrencies.
When you sell a cryptocurrency for more than you paid for it (aka, you have a crypo asset), the difference between the selling price and the purchase price is considered a capital gain. This gain is generally subject to CGT, unless it falls within a few specific exemptions or reliefs.
When does CGT apply to cryptocurrency sales?
CGT is typically triggered in the following scenarios:
- Selling cryptocurrency for fiat currency: This is the most common situation. When you exchange your cryptocurrency (like Bitcoin or Ethereum) for traditional currency (like pounds sterling), you’ll usually incur a capital gain.
- Exchanging one cryptocurrency for another: Swapping one cryptocurrency for another (e.g., trading Bitcoin for Ethereum) is also considered a disposal and may result in a capital gain or loss.
- Using cryptocurrency to purchase goods or services: While not as common, using cryptocurrency to buy something is generally treated as a disposal, and CGT may apply.
It’s important to note that simply holding onto your cryptocurrency without selling or exchanging it does not trigger CGT.
Calculating Your Gains
To calculate your capital gain, you need to determine the following:
- Acquisition cost: This is the original price you paid for the cryptocurrency, including any fees or expenses incurred at the time of purchase.
- Disposal proceeds: This is the amount you received when you sold or exchanged the cryptocurrency.
- Allowable expenses: These are costs directly related to the purchase, sale, or ownership of the cryptocurrency, such as trading fees or storage costs.
Now for the maths… The calculation looks like this:
- Capital gain = Disposal proceeds – (Acquisition cost + Allowable expenses)
If the result is a negative number, you have a capital loss, which can be offset against other capital gains in the same tax year.
Importance of keeping accurate records
Keeping detailed records of your cryptocurrency transactions is really important for calculating your CGT liability. Accurate records means you’re less likely to slip up and face some hefty fines (or worse, jail time.) You should keep records of:
- The date of purchase and sale
- The amount paid for the cryptocurrency
- The amount received from the sale
- Any fees or expenses incurred
- The cryptocurrency’s value at the time of purchase and sale
These records will be crucial when completing your Self Assessment tax return. It’s probably a good idea to keep digital and paper copies of your records in a secure location, though.
Exemptions and reliefs
There are some exemptions you may be eligible for that could help cut down your tax bill.
Annual exempt amount
Every individual in the UK has an annual exempt amount for CGT. This means you can make a certain amount of profit from selling assets, including cryptocurrency, without paying any tax.
If your total capital gains for the tax year are below the annual exempt amount, you won’t owe any CGT. However, any unused portion of the exempt amount cannot be carried forward to future tax years.
Other reliefs
There are even some other circumstances where you might be able to reduce or completely get rid of your CGT liability:
- Losses: If you sell a cryptocurrency for less than you paid for it, you’ve made a capital loss. You can offset this loss against capital gains from other assets in the same tax year. Any unused loss can be carried forward to offset future gains.
- Gifts to a spouse or civil partner: Transferring cryptocurrency to your spouse or civil partner is generally exempt from CGT.
- Charitable donations: Donating cryptocurrency to a registered charity can qualify for capital gains tax relief.
Tax-free transactions
Some cryptocurrency transactions are completely exempt from CGT:
- Moving cryptocurrency between your own wallets: Transferring cryptocurrency from one of your wallets to another is not considered a disposal, so you can do that freely.
- Gifting small amounts: Small gifts of cryptocurrency to individuals may not be subject to CGT, but this depends on various factors.
It’s important to note that the tax landscape can be pretty complicated, and these are just general guidelines. For specific advice and up-to-date information, why not join our community of Crypto Tax Degens?
When might income tax apply?
There’s another tax to consider: Income Tax. This tax applies when you receive cryptocurrency as a form of income, rather than from selling it for a profit.
Here are some common situations where Income Tax might apply:
- Crypto mining: If you use powerful computers to solve complex mathematical problems to earn cryptocurrency, this is considered income. The value of the cryptocurrency you mine is taxable.
- Staking rewards: Some cryptocurrencies let you “stake” your coins to help secure the network. In return, you often receive rewards. These rewards are treated as income and are subject to Income Tax.
- Airdrops: Sometimes, cryptocurrency projects give away free coins (called an “airdrop”). If you receive these because of something you’ve done, like owning other cryptocurrencies or using a particular service, the value of the airdrop might be taxable income.
- Payment for goods or services: If you’re paid in cryptocurrency for a job or for selling something, that cryptocurrency is considered income and you’ll need to pay Income Tax on its value.
Calculating and reporting income tax on cryptocurrency
Figuring out how much Income Tax you owe on your cryptocurrency income can be a bit tricky. Here’s a general guide:
- Work out the value of the cryptocurrency: You need to find out how much your cryptocurrency was worth at the exact time you received it.
- Add up all your cryptocurrency income: Total up the value of all the cryptocurrency you’ve earned throughout the tax year.
- Combine with other income: Add your cryptocurrency income to any other money you’ve earned, like your salary or wages.
- Figure out your tax rate: The amount of tax you pay depends on how much money you’ve earned in total. There are different tax rates for different income levels.
- Report your income: You need to tell the government about the cryptocurrency income you’ve earned. This is usually done on a form called a Self Assessment tax return.
Important: Like we said with CGT, you need to be keeping detailed records of all your cryptocurrency transactions. This includes when you received the cryptocurrency, how much it was worth, and any fees you paid. These records will help you work out your tax bill and prove your numbers to the tax authorities if needed.
Remember: Tax rules can be complicated, especially when it comes to something new like cryptocurrency. If you’re unsure about anything, it’s always a good idea to talk to a tax professional or join a community like ours at Crypto Tax Degens.
Start taxing your crypto assets in the best way possible
Figuring out your taxes on cryptocurrency can be tricky, there is no getting around that fact. There are different kinds of taxes you might need to pay, depending on what you do with your crypto.
Like we said, it’s important to keep track of everything and know the rules, so you don’t end up owing more tax than you should.
If you’re not sure what to do, it’s a good idea to ask someone who knows about taxes and cryptocurrency. There are people who can help you understand the rules and work out how much tax you owe.
And for the best advice in the game, consider joining our Crypto Tax Degens community! Gain exclusive access to expert insights from Andy Wood, a seasoned crypto tax professional, who can guide you through the complexities of crypto taxation. Don’t leave your tax planning to chance—get the right advice today and ensure you’re fully prepared.
Don’t stress about it too much! Getting help can make things a lot easier.