Taxation of Cryptocurrency in U.K.
There is a lot of confusion and misinformation circulating about the taxation of cryptocurrency in the UK. Many people assume it is outside the scope of general taxation as it has more in common with gambling or having winning numbers on the lottery. Within the UK taxation system, this is not the case.
In March 2021. New guidance was issued by Her Majesty’s Revenue and Customs (HMRC). It set out the guidance on the taxation of crypto assets (under which cryptocurrency is included). It marked a much firmer stance by the UK government on the profits made from cryptocurrency.
If you want to avoid any trouble with HMRC, it’s best to understand the rules and ensure that you follow any regulations.
How Does HMRC Class Cryptocurrency?
In the eyes of HMRC, cryptocurrency is technically neither money nor currency. They class it as:
- Exchange tokens – E.g. Bitcoin
- Utility tokens – give the holder access to goods or services
- Security tokens – allow the cryptocurrency holder the right to any profit and loss in a business
- Stablecoins – a cryptocurrency that is linked to a stable asset such as gold
While this description lays out the definition of the crypto assets you hold, the type and amount of tax you are liable for depends on how each of these tokes is used.
General Taxation Rules
The taxation of cryptocurrency is dependent on how you are using it. If you have cryptocurrency as part of your personal investment portfolio, then this will be subject to Capital Gains Tax (CGT). You will incur CGT when you dispose of your cryptocurrency. The disposal can include selling it, trading it, or using it to purchase something).
For the purposes of taxation, the capital gain is calculated as the difference between the value of the cryptocurrency you dispose of minus the value of it at the time it was bought.
Capital Gains Tax does not apply to those people who are considered to be trading cryptocurrency. This will be classed as a general business transaction and will instead fall under Income Tax rules. What HMRC classes as ‘trading’ is clearly defined and they will look at each case on its own merits. In these cases, they will look at the activity in terms of the number of transactions and the sophistication of the operation.
Activity that can trigger CGT or income tax includes:
- Selling your cryptocurrency for currency
- Exchanging one cryptocurrency for another
- Paying for goods and services with cryptocurrency
- Gifting cryptocurrency to another person
Personal Allowance 2020/2021
As a UK resident, you are entitled to earn or a certain amount per tax year without being liable for tax. In the 2020/2021 tax year, this amount is £12,300.
Gifts to charity or a spouse are also tax-free.
Registering With HMRC
In order to keep compliant with UK tax law, you need to register with HMRC if you do not usually file a tax return (for example, if you are in employment and usually pay your tax through PAYE). The deadline for registering with HMRC is six months after the end of the tax year.
It’s important to remember that you will only be liable to pay CGT if and when you dispose of the cryptocurrency. It doesn’t matter what the fluctuations in cryptocurrency do to the value of your crypto, it’s only when you benefit from its disposal that you need to pay tax.
How Much Will You Be Taxed?
How much tax you are liable for will depend on a number of factors including how much the cryptocurrency was originally purchased for, the amount that it was sold for, and any other income you make from employment or other channels.
If you are already earning over the personal tax allowance threshold, you can expect to pay 10% or 20% depending on your other income.
How Do HRMC Know About My Cryptocurrency Assets?
You might be tempted to think that what HMRC doesn’t know won’t hurt them, but you’d be wrong. They receive trading information from the major exchanges and know who should be paying taxes. So it is better to follow the taxation rules rather than get into serious trouble for tax evasion.
Taxation of cryptocurrency in the UK has evolved over recent years, a sign that they are taking the crypto market seriously and want to close any loopholes that allow for large-scale tax avoidance.
Depending on the type of cryptocurrency activity you undertake, you can be liable for either CGT or income tax.