As with any other asset or income you make in the UK, crypto is subject to tax. Two main kinds of tax apply to cryptocurrency in the UK depending on how much you earn, and these are income tax and capital gains tax. There are also circumstances where you may need to pay tax on crypto, but for most people earning crypto, it is considered a taxable income in these two main ways.

Whether you trade, buy or sell crypto like Bitcoin or Litecoin in the UK, you may be subject to tax obligations when you make a profit on these assets.

The HMRC has specific guidelines for cryptocurrency and the tax that may need to be paid on these assets, which we will discuss in this guide. We will also be sharing the different ways you may be taxed on your digital assets and where you stand when selling crypto in the UK.

Do I Have To Pay Crypto Taxes?

The short answer to this question is yes; you do have to pay crypto taxes in the UK whether you buy, sell, or trade cryptocurrency.

While cryptocurrency, along with any other digital assets currently in the market, is largely unregulated in the UK, it does still need to be claimed as an income in your self-assessment tax return at the end of the financial year. Her Majesty's Revenue and Customs (HMRC) views Bitcoin and any other cryptocurrency in the same manner as any other asset you may deal with, like real estate or stocks and shares.

This means that buying and selling crypto for a profit makes your income susceptible to capital gains tax based on the profit you make. In some cases, you may also have to deal with income tax on cryptocurrency in the UK if you are seen to have a regular income from your digital assets or earn interest on these profits.

In 2019, HMRC released guidelines regarding UK crypto taxes and how they will affect digital earnings. This was the official listing of the tax liabilities that people working with crypto have to face, and it is a legal obligation to pay tax on crypto.

Like any other asset you can earn money from, crypto investments are considered to be a taxable event in the UK and therefore need to be claimed in your self-assessment tax return along with any other miscellaneous income you may earn.

What Kind Of Tax Do I Need To Pay On Crypto?

The financial trade in the UK has no specific cryptocurrency tax bracket nor a specific form of tax that needs to be paid on this kind of asset, but this does not mean your crypto gains are going to be tax-free.

There are two main kinds of tax that you may need to pay when dealing with crypto: Capital Gains Tax

Capital gains tax is a charge for any profit that is made through the disposal of an asset, which now also includes digital assets and crypto tokens: Income Tax

This tax is based directly on personal income and applies to specific kinds of income you may earn, such as the interest on crypto.

In some cases, you may also have to pay National Insurance Contributions for your crypto. National Insurance Contributions (NIC) come from wages over a set amount and are used to pay for public services. This tax will apply to those who are paid in cryptocurrency and earn a regular wage this way.

If you are employed with a registered business, this will come automatically on your payslip. Those who are self-employed can also contribute, but this needs to be done through self-assessment.

Whether you have to pay capital gains tax or income taxes will vary based on how much you make from crypto, and the specific transactions made using this currency.

Do I Have To Pay Capital Gains Tax?

For the HMRC capital gains summary, it is important to note that in UK law, crypto is classed as a capital asset. This means that when you dispose of a capital asset, you get capital gains which is what you have to pay as part of the crypto taxes.

Disposal of crypto, which makes you subject to paying capital gains tax, includes:

  • Selling crypto for GBP or another financial fiat currency
  • Trading crypto for other cryptos
  • Spending crypto on goods and services
  • Gifting crypto, although there is a tax-free allowance for gifting between spouses or civil partners.

When you make disposal, you do not have to pay tax on the entire proceeds but instead just the crypto gains, which is any profit you make.

According to HMRC, cryptocurrency is not considered money in the UK but is instead categorized in four ways. This means it does not fit into the basic income tax band and instead relates more to capital gains in most cases.

The following are all ways in which capital gains tax applies:

  • Stablecoins: The kinds of cryptocurrency that are used for fiat currency or other assets
  • Exchange Tokens: The crypto that is used as a means of payment
  • Security Tokens: Crypto with interests or rights in a business
  • Utility Tokens: To give access to certain goods and services on a platform, such as DLT (distributed ledger technology)

As well as this, you will also have to pay tax for mining income, airdrops, and confirmation awards. These are also considered to be taxable income in the UK and apply to capital gains tax.

HMRC may consider your capital losses from crypto assets as a tax liability. This means that if you sell crypto at a loss, this loss can be deducted from your overall capital gains tax bill.

Do I Have To Pay Capital Gains Tax On All Crypto?

Every UK taxpayer is subject to a capital gains allowance of £12,300 which means you only have to pay this crypto tax on anything over this amount. This applies to all capital gains taxes, including those for digital assets.

Depending on how much you earn and the profit margins of your crypto capital gain, the percentage that is subject to capital gains tax will vary from around 10% to 20%.

You can work out how much capital gains tax you need to pay on crypto by determining your cost basis. The UK cost basis method is how much it costs to buy crypto at the time of purchase, including any transaction fees. If you have gotten crypto from any other means, such as airdrop, then you will need to determine the Fair Market Value.

The Fair Market Value is how much the crypto was worth in GBP on the day you received it in the wider market. If you got crypto yourself or through another means than buying it, then you will need the Fair Market Value instead of the cost basis to determine how much capital gains tax you will have to pay.

Once you have the cost basis or Fair Market Value, you can determine your capital gains or capital losses from your crypto in a tax year.

A capital gain or capital loss is the difference in value from when you first got the crypto to when you disposed of it. The disposal can take many forms, including selling crypto, spending it, or gifting crypto unless this is to a spouse or civil partner, in which case it is tax-free.

To determine whether you are working with a capital gain or capital loss, subtract the cost basis from the amount you sold, gifted, or spent the crypto for.

If you are working with a profit from your crypto, then you are in capital gains. This means you have to pay capital gains tax on crypto. If you have a loss, then you do not have to pay capital gains tax on this amount, but this is not the end of the story.

It is important for you to keep track of your capital losses just as much as your capital gains because losses can be offset against any profits to reduce your tax bill at the end of the tax year.

As of the current financial year, the limits for capital gains tax are:

  • Transaction fees that were paid before the transaction is added to the blockchain
  • Advertising costs when looking for a buyer or seller
  • Costs for drawing up a contract for the transition
  • Any costs for valuating that goes towards helping you work out your gains

It is important to note that you cannot deduct any costs or fees that have already been processed or have already been spent against capital gains. You also cannot deduct any mining fees from this.

Do I Need To Pay Income Tax On Crypto?

Another kind of tax that you may have to deal with is the crypto income tax. There are some cases where your crypto assets may be considered as income which means you will have to pay income tax in the UK.

The way that you earn, the kind of crypto transactions you deal with, and how much you have can make crypto subject to income tax. In some of these instances, where crypto is taxed as income, you may also have to pay National Insurance.

According to HMRC, crypto is subject to income tax band in these circumstances:

  • Getting paid in crypto means you are making an income from crypto. Crypto Income is known as 'money's worth' and is also subject to National Insurance as well as being subject to income tax
  • Staking rewards
  • Mining income, which comes from mining tokens
  • Air drops, although there are some exemptions from this

HMRC has also released guidelines on crypto transactions done through Decentralised Finance (DeFi), such as for lending and staking. However, these guidelines indicate that transactions made through this method may be subject to capital gains or income tax depending on the kind of transferring crypto taking place.

If your activities look like income, then you will be given the income tax treatment from DeFi transferring crypto. For the most part, this will only apply to the returns made from any transactions on this platform.

This means that rewards from staking, yield farming, and lending can be considered income and is then part of the income tax band. You will have to deal with this tax rate in this case if:

  • The return made in crypto has been agreed and is therefore confirmed
  • The return has been paid by the borrower or DeFi
  • The return is paid periodically over the period of lending and staking, which makes it seem like an income from a tax perspective

This means that if you are earning new coins or tokens in this way, then you will have to pay tax like you would on any other income. Although crypto is not considered the same as other money in standard pound sterling bank statements, it can be part of the income tax band along with other miscellaneous income in these circumstances.

Crypto can also be considered as income through staking and mining on other platforms, although there are no specific guidelines for this yet in the UK crypto tax space. You should seek further tax advice if you are earning UK crypto in other methods, such as engage to engage or play to play, but it is safe to assume that it will be part of this basic tax band as well.

With this in mind, other forms of crypto income that can be considered part of the income tax rate include:

  • Referral rewards
  • Learn to earn campaigns
  • Watch to earn platforms
  • Browse to earn platforms
  • Play to earn
  • Shop to earn, such as browser extensions
  • Share public address to earn on specific platforms

Although these are not officially listed as part of the income tax band for crypto, you will likely have to pay taxes for these kinds of crypto earnings.

How Much Income Tax Do I Need To Pay?

If crypto is considered as income and, therefore, a taxable event in this regard, then how much tax you need to pay can vary based on how much you earn, and the income tax rates.

In the UK, there are income tax bands that apply to standard earnings and miscellaneous income, which can impact your total crypto income tax. This determines the percentage of your earnings that is considered taxable income and, therefore, how much you need to pay.

If you do pay income tax, you will earn over the threshold, and crypto tax is a part of this.

There is a personal income tax allowance which can reduce how much crypto tax you need to pay, even on earnings. Everyone in the UK, much like with capital gains taxes, is given a tax-free allowance for income, trading profits, and crypto assets of £12,570.

Much like in a capital gains taxable event, which means you exceed the capital gains tax allowance, you have to pay income crypto tax in the UK once you exceed this limit with your trading profits and earnings. To determine how much, you must pay tax on crypto, there are several tax bands. Income tax in the UK is classified into separate bands, which are:

  • For earnings up to £12,570, you are in the personal allowance band, which means you do not pay anything from your crypto assets
  • With earnings between £12,570 and £50,270, you are in the basic crypto taxed band, which means you pay a basic rate on crypto assets. This is 20% of all trading profits and earnings
  • Earnings between £50,271 and £150,000 for both crypto assets and other income, you are considered in the Higher Rate tax band and need to pay 40% in crypto tax
  • Earnings over £150,000 are an additional rate, and you need to pay 50% in UK crypto tax

Some tax liabilities can contribute to your tax rate, and you do not pay the same amount on all total taxable gains in the same tax year. The tax rate applies to the different amounts of income you bring in, so those earning crypto gains as part of their total taxable gains can pay anything from 0% to 45% in crypto tax.

UK tax software, such as coinpass, can be used to determine how much you need to pay and can make it easier to fill out your self-assessment ahead of time. The income and capital gains tax rates may vary depending on the financial year, so you should seek professional advice if you are struggling to balance the books this tax year.

Can I Avoid Paying Tax On Crypto?

Whether you are dealing with a crypto income or a crypto capital gains taxable event, you cannot avoid paying tax completely.

HMRC can track all crypto investments as they have a sharing platform with all UK exchange software, including coinpass, and has crypto transaction data from as far back as 2014. The government also has the KYC information that is provided by users when they register to any digital wallet or exchange platform in the UK.

This means there is no hiding the money you earn from crypto, no matter how much this is or how it is earned. As the government knows you are earning money from crypto, failing to claim these incomes or capital gains in your self-assessment tax return can be considered tax fraud and has serious consequences.

From fines to prosecution, failing to pay taxes on crypto can have serious consequences, much like failing to pay tax on any other income or asset you have.

There are some ways that you can legally reduce the amount of tax you have to pay on crypto, such as taking advantage of your capital gains tax allowance or transferring funds to your spouse or civil partner to double this allowance. While you can legally reduce your crypto tax, it cannot be avoided completely if you want to stay on the right side of the law.

Conclusion

In the UK, there are specific requirements for crypto earnings or investments, which can mean you need to pay tax. Depending on how much you earn, the transactions that you use crypto in, and the number of digital assets you own, the kind of tax you need to pay can vary greatly.

Taxes are a percentage of earnings or assets that are required to be paid to the government, whether this is to pay for public services or other aspects. Your total capital gains tax or income tax bill at the end of the financial year will vary greatly based on how much profit you have from crypto, and it is advised that you speak to a financial advisor if you are struggling to see where to stand to ensure you are behaving correctly.

Overall, if you are buying, selling, or trading crypto in the UK, then you do have to pay taxes on any profits you earn. This may be income or capital gains tax, depending on the circumstances, which requires a percentage of all your investments to be paid to the government at the end of the financial year.

Failure to pay taxes can be a criminal offense, so it is something you do not want to avoid, and learning what tax rules apply to you is a good place to start. Trading, buying, or selling crypto could be subject to tax bands in the UK, and it is best to see where you stand ahead of the end of the tax year, so you always stay on the right side of the law.