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Introduction
It is no secret that the rise of cryptocurrencies has introduced a new realm of financial opportunities for UK crypto fans. Along with the potential profits, crypto earnings also come with their fair share of tax obligations. Understanding them can help you stay on the right side of HMRC.
No matter how you’ve earned your crypto profits – investing, trading, mining, or staking, we’re here to help keep things simple.
So if you are looking for some expert insight into the world of crypto tax, why not consider joining our community of like minded crypto tax degens as we work through the complicated and ever changing world of crypto tax together.
Why are crypto profits subject to tax?
Cryptocurrencies like Bitcoin, Ethereum, and others are considered taxable assets in the UK.
This broadly means that the profits from buying and selling crypto will be taxable as well as other activities – such as staking and mining.
The precise treatment depends on the activity which could be categorised as follows:
- Buying and selling crypto: These disposals of assets will be subject to capital gains rules (unless the activities are commercial and organised – then taxed as a trade)
- Staking (whether POS or DeFi): The return on investment will be taxable as income
- Crypto lending: The yield that you receive from a platform of liquidity pool is likely to be taxable income
Anything that you earn through P2E will also likely be subject to income tax (although the sale of in-game NFTS will, again, likely be subject to CGT).
If a business receives crypto instead of cash for goods or services, then this revenue is accounted for in the same manner as other receipts.
What is Capital Gains Tax?
Capital gains tax (CGT) applies when you sell, exchange, or dispose of your crypto for more than its original cost. CGT is calculated based on the gain (selling price minus the acquisition cost) and the individual’s annual exempt amount. The rate of CGT depends on your overall taxable income and can range from 10% to 20% for most individuals.
For the average crypto investor, their profits will fall within the CGT regime.
The capital gains rules also apply to companies, however, the capital gains are subject to corporation tax.
How are the income tax rules applied?
While most crypto earnings fall under CGT, some situations trigger income tax instead. Here’s a breakdown:
- Frequent Trading: If you buy and sell crypto frequently and in an organised way (like a business), your profits may be considered income and taxed as such, along with National Insurance Contributions (NICs). This is uncommon for most casual investors.
- Yield Farming: Rewards earned from DeFi platforms or liquidity pools are generally taxed as income, likely classified as “Miscellaneous Income.” However, in rare cases with frequent trades, it could be considered trading income.
- Crypto Mining: The rewards you receive from mining crypto, whether as a hobby or a profession, are subject to income tax.
- Play-to-Earn (P2E) Games & Metaverse Rewards: Earnings from P2E games or rewards received in the metaverse are likely taxed as income.
When do I pay the tax I owe on my cryptocurrency?
For both income tax and CGT, You have until the self-assessment deadline (31 January following the end of the tax year) to report and pay any tax due.
How can I reduce the tax CGT I pay on crypto?
While you can’t avoid paying taxes on crypto earnings, there are legal ways to help reduce your tax liability:
1. Utilise the Annual Exempt Amount
Each tax year, you have a tax-free allowance known as the annual exempt amount. By timing your sales strategically and staying within this limit, you can minimise your CGT liability. By spreading out the sales, you can utilise the annual exemption in each tax year, reducing the overall CGT burden.
2. Loss Offsetting
Loss offsetting is using capital losses from certain investments or cryptocurrencies to offset capital gains from other investments or assets. When you sell an investment at a lower price than what you originally paid for it, you receive a capital loss. Capital losses from other investments or cryptocurrencies can be offset against your gains, reducing your overall taxable capital gains.
3. Tax-advantaged wrappers
In theory, you may consider using tax-advantaged accounts such as ISAs or pension schemes, which offer tax-efficient ways to hold cryptocurrencies and potentially shield your gains from taxation.
However, in practice, these are still mainly operated by traditional banks that have not yet embraced these new wave of digital currencies. There are some more agile providers who do offer these services, but make sure to do your research in advance.
Always stay on the right side of the law with Crypto Tax Degens
Remember, seeking professional crypto tax advice is always a good idea to ensure completely compliance and to make informed decisions in the crypto space. Sound like something you need? Luckily, you’ve found the right people.
Join our community of crypto tax degens today for evergreen information about the complicated crypto tax world, straight from the mouth of notorious crypto tax expert, Andy Wood.