All you need to know about the UK Crypto Tax in 2023

If you’re living in the UK and own crypto, you must know how the crypto tax system works. Furthermore, having a deeper understanding of how the HM Revenue and Customs (HMRC) regulates Bitcoin and other cryptocurrencies is crucial for crypto management.

This article will help you understand capital gains tax for crypto, crypto income tax, HMRC jurisdiction in crypto, bypassing tax on crypto, calculating crypto tax, etc. This guide will have all the information about UK crypto tax and will help you finish up your tax calculations before the January 31st deadline!

Paying crypto tax in the UK

So, do you have to pay crypto tax in the UK? – the answer is yes. This form of currency is taxable in the United Kingdom. The HMRC is sure that a crypto holder would need to pay taxes through capital gains as well as income tax concerning crypto ownership.

So, how much will it cost you? – if you go over the £12,300 mark in crypto capital gains, you’ll need to pay 10-20% tax.

In case of extra income beyond the personal allowance, the tax will be anywhere between 20-45%. The specific tax amount will depend on the particular exchange and the income tax bracket you are under.

The UK government recently announced that the Capital Gains Tax limit of £12,300 would be reduced to £6,000 from April 2023.

Is the HMRC tracking crypto?

Yes, the HMRC has full authority to track cryptocurrencies and share data with all UK exchanges. Their database involving crypto exchanges can have information from 7-8 years ago. They also have your KYC (Know Your Customer) if you’ve signed up for any UK exchange.

The HMRC has been working with major crypto exchanges to access KYC data in the last couple of years. This helps them to keep crypto investors in check by sending them reminder emails about their crypto payments and pending crypto taxes.

Almost a year ago, Coinbase made their customers aware that they were sharing customer account data with HMRC if those customers had more than £3,000 in crypto.

Which cryptocurrencies are tax-free?

Fortunately, crypto-holders in the UK don’t have to pay tax on each crypto transaction. Tax-free transactions are as follows:

• • If you purchase crypto with the British pound sterling.

• • If you’re holding onto crypto assets by not selling them.

• • Self-transferring crypto between your accounts or wallets.

• • Charity donations.

• • Transferring crypto assets to your spouse as a gift.
    
    

Apart from these transactions, every other crypto exchange requires you to pay tax. In the UK, your crypto transaction can fall under Capital Gains Tax or Income Tax, there is no tax exclusively for crypto.

The income tax for crypto applies to those who are earning income via crypto. On the other hand, if you are trading crypto assets or using crypto to buy stuff – you’ll be paying capital gains tax additionally.

So, whenever you dispose of your crypto asset, you’ll be paying CGT. These disposals could be:

• • Selling it for the British pound sterling or some other fiat currency.

• • Swapping one form of crypto for another – this also includes Stablecoins.

• • Using crypto to purchase goods and services.

• • Rewarding crypto to anyone else other than your spouse.
    
    

It is important to note that you will not be paying CGT on the whole transaction amount, but only on profits coming from crypto.

Additionally, the HMRC is gradually taking DeFi exchanges into the tax bracket. However, there is nothing specific yet.

Crypto CGT rates in the UK

Most countries other than the UK have short-term and long-term CGT rates. In the UK, both come under the same tax bracket. The amount of CGT (Capital Gains Tax) you’ll be subject to is directly proportional to your income.

If you fall under the Basic Rate Income Band (total income of up to £50,270), you’ll be paying a 10% tax. People under Higher Rate Income Band (up to £150,000), will pay 20% tax. The tax level does not change if you’re earning over £150,000.

Of course, not every crypto exchange will net you a profit. In case of capital losses, there will be no CGT. However, it is a useful practice to note every loss and report them to HMRC. This can balance capital losses with gains and save you a lot of money.

You can apply unlimited capital losses to reduce capital gains. If you can manage to reduce your gains to £12,300 – you won’t have to pay any tax for capital gains. You can also carry forward current capital losses to limit capital gains in the future as much as possible.

So, it is highly important to register all your losses while submitting your tax return form. Although, if you register your losses with the HMRC immediately – you won’t have to put the losses in the tax return form. The HMRC gives taxpayers a 48 months time limit to register their capital losses. If you miss this deadline, you won’t be able to carry out this process anymore.

Let’s look at an example to fully understand the process of offsetting future gains and paying less tax. 

Example – John got a £20,000 profit (gain) by selling Ethereum in 2022, but in the previous year, he lost £10,000. He registered this loss with HMRC and his £12,300 CGT free allowance is fully intact this year.

So, with the help of his £10,000 loss last year he can offset his profit this year – reducing it by £10,000 and paying less tax. This will ensure he still has £2,300 left in his allowance bank and will not be paying any CGT this year!

What happens with lost or stolen crypto?

Unfortunately, the HMRC does not count the loss or theft of crypto as a loss of capital. In some cases, you may appeal for reimbursement against capital loss. Now, let’s understand how you can figure out your crypto gains and losses.

Calculation of gains and losses

First, we need to understand the concept of Cost Basis. It is the total cost of crypto you got and a transaction fee. Once you have the cost basis, it is simple to calculate capital losses and gains.

The capital gain or loss is equal to the difference between your cost basis and the current value (value at the time of disposal). Mathematically, the equation would look something like this:

Capital gain = Crypto value (current) – Cost basis (current crypto value > cost basis)

Capital loss = Crypto value (current) – Cost basis (current crypto value < cost basis)

The HMRC in the UK follows a particular set of rules while calculating capital gains and losses using the cost basis method. This is known as – Share Pooling. It prevents investors from influencing gains or losses by bulk purchases and selling of crypto assets in a short duration – making the crypto market seem more favorable.

In the United Kingdom, there are three methods under the cost basis process of calculation. Out of these three, you’ll have to figure out which method applies to your portfolio.

• • Same-Day rule – If the buying and consequent selling of crypto assets happen on the same day, you’ll have to figure out your gains and losses using the cost basis. If you’ve bought less than what you sold that day – refer to the next rule.

• • Bed & breakfast rule – If your sold and purchased crypto assets are in sync every month – you’ll calculate your cost basis within the month. If you’ve sold more than what you’ve bought in a given month – refer to the final rule.

• Section 104 rule – In this case, you calculate your average cost basis for a bunch of assets by dividing the total payment for all assets by the number of tokens you hold.
  
  

UK Capital Gain Rules – Finanche Limited

Tax breaks in crypto

In the UK, you can take advantage of tax breaks, pay less tax and save a lot of money. First, you get a £12,570 tax-free allowance on personal income in a given year. However, if you earn over £125,140 in a year, you don’t get this allowance.

Second, any income you generate from trading or property is tax-free up to £1000. Furthermore, if you have gained £1,000 from both trading and property – you get a tax break of £2,000.

Finally, from next year the CGT allowance will come down from £12,300 to £6,000. Similarly, from April 2024, it will reduce by 50% again and reach £3,000.

UK income tax on crypto

Income from crypto or in the form of crypto falls under the same tax bracket as regular tax bands. In some cases, you must pay insurance taxes as well from crypto. In the United Kingdom, you’ll pay income tax on crypto if:

• • You’re getting your salary in crypto.

• • Trading tokens to make profits (staking rewards).

• • You’re partaking in the activity of crypto-mining.

• • You’re into crypto air-drops.
    
    

In the case of DeFi transactions, taxation protocols would depend on the nature of the exchange and whether it falls into income or capital gains. If you are getting new tokens by depositing your crypto into a diverse crypto pool, it will fall under the income zone.

Other examples of income from crypto are:

• • Rewards from referral programs

• • Learn-to-earn activities

• • Watch-to-earn activities

• • Browse-to-earn activities

• • Play-to-earn activities

• • Shop-to-earn initiatives via extension in web browsers
    
    

Crypto income tax rates in the UK

Crypto income tax rules also follow the usual income tax bands. The taxing system is progressive – at every income level there is a tax multiplier and the growth is not linear. Those earning up to £12,570 pay no tax, as they are within the allowance level. People earning between £12,571 and £50,270 are eligible for 20% tax. 

Those earning above £50,271 and below £150,000 would have to pay a 40% tax and those with income of more than £150,000 – get a 45% tax rate. People earning more than £125,000 don’t get any allowance and those getting more than £100,000 annually get a lesser amount of allowance. 

Calculating your crypto income

Before calculating your crypto income, it is essential to establish the fair market value of your crypto tokens on the day you got them in the British pound sterling. Let’s go over an example to see this process.

Example – Rebecca earns £4,000 in extra income from a multitude of crypto assets. She has to calculate how much income tax she’ll be paying on this. Her annual income in FY 2020-21 was £40,000, putting her in the tax slab of 20%.

So, she will have to pay a 20% tax on her additional income from crypto = 20% of £4,000 = £800.

Remember that purchasing crypto with any fiat currency is tax-free. However, purchasing crypto with crypto will be taxable, and the rules vary from country to country. So, if you are selling Ethereum to get Bitcoin, you’ll be paying Capital Gains Tax – if you make a profit in the process.

If you’re planning to hold on to your crypto and not use them for any transactions, you won’t have to pay any tax. If you are planning to buy or sell crypto with Stablecoins, any profit will be subject to CGT. However, if your Stablecoin is linked to a reserve currency – you might not have to pay any tax as chances are you won’t be making any profit or loss.

Paying taxes while transferring crypto

You should never pay any tax if you’re moving your crypto between your wallets or accounts. The HMRC does not view this as a disposal and does not subject such transactions to CGT. However, transfer fees complicate the matter.

While self-transferring crypto wallet-to-wallet, you’ll have to pay a transfer fee to your wallet provider. Paying this service fee in any fiat currency will not incur additional tax. Paying this fee in crypto will be subject to CGT on any profit – as per the rules set by the HMRC.

If you decide to add/remove liquidity by making use of DeFi rules, there will be no tax unless you get a token after the crypto exchange. If you do get a token, it will be subject to CGT.

Taxing airdrops and forks in the UK

Fortunately, you’ll pay no taxes for either hard or soft forks in the United Kingdom. On the other hand, airdrops are subject to both income tax and capital gains tax. In the case of soft forks, you won’t be receiving any new tokens, so there’s no question of paying any tax.

In the case of hard forks, even though you will get a new token – there will be no income tax. However, if you choose to sell, swap, spend or gift it away – you’ll have to pay Capital Gains Tax.

Most countries see Airdrops as a bonus and are subject to income tax. Furthermore, when you sell, spend, swap or gift airdrop tokens at a later date – you’ll have to pay CGT as well.

Tax while gifting or donating crypto

Using crypto as a gift would incur tax in the UK, as you’re disposing of it and might make a profit from it. You’ll be paying CGT in this case. However, gifting it to your spouse is exempt from CGT.

Furthermore, charity donations are also tax-exempt. However, there are a few exceptions:

• • If you’re selling the crypto to a charity and making a profit, you will have to pay CGT.

• • If the donor makes charity arrangements to gain financial advantage by staging a legit donation – the person will have to pay CGT.
    
    

 

Tax from crypto-mining in the UK

Crypto-mining can either be a hobby or a business depending on certain factors such as the extent of activity, level of organization, potential risk, and commercial value. Hobbyists will have to pay income tax on mined tokens along with CGT while disposing of those tokens later. In this situation, the income from mining will be put under – ‘miscellaneous income’.

In the case of mining businesses, their income from mining will be put under trade profits and incur income tax. Furthermore, rewards coming from mining will be added to taxable income and suitable expenses will be not put under this. While selling, swapping, or trading the tokens any profit in value would be put under trade profits and incur income tax. Additionally, the business will have to make contributions to the National Insurance.

Tax involving crypto day trading in the UK

There is no specific rule on day-trading involving crypto as per the HMRC. However, there are some general guidelines to keep in mind. If you’re active in something speculative like gambling – there won’t be any taxes.

If you’re self-employed, you will be subject to business tax and if you’re a part-time private investor – your gains will be subject to CGT in most instances.

Most crypto investors would fall under the private investor category. In an open position as a private investor of crypto, you won’t be paying any taxes. Once you close your position, your profits (if any) will be subject to CGT.

Spread betting is highly controversial in the UK and many crypto firms have been banned for not removing derivative cryptocurrencies. However, spread betting is a speculative activity and does not incur CGT. There is a lot of ambiguity concerning these, tax protocols could depend upon case details.

In the case of Decentralized Finance or DeFi – you’re earning new tokens, your profits will be subject to Income Tax. On the other hand, if you’re disposing of your DeFi tokens and making a profit – you’ll be paying CGT. Likewise, lending or borrowing crypto via DeFi rules would incur CGT. Interest payments could fall under Income tax or CGT depending on the method of payment.

Disposing NFTs (Non-Fungible Tokens) would attract CGT if you’re making any profit in the exchange process. When you’re earning from DeFi, it would be put under additional income and will be subject to income tax. When you’re disposing of tokens through DeFi rules, any profits will be subject to CGT. Spending crypto is equivalent to disposing of your asset and will be subject to CGT on any gains.

Reporting crypto taxes to HMRC

The financial year in the UK starts from April 6th of the current year to April 5th of next year. So, you’ll be reporting all your crypto taxes to the HMRC by January 31st, 2023. Due to the pandemic, this deadline was postponed last year and this year that most likely won’t happen. Keep in mind that in case you’re planning to send tax returns via post – the deadline is October 31st in the UK.

Documents to keep handy

Crypto owners need to keep close track of the following details for proper bookkeeping of crypto:

• • Nature of crypto asset

• • Transaction date

• • Whether tokens were sold or bought

• • Number of individual tokens

• • Transaction value in British Pound Sterling

• • Cumulative value of all the tokens

• • Wallet details, and bank statements for inquiry or review.
    
    

Reducing taxes on crypto in the UK

There are certain legal strategies you can follow to reduce your crypto tax. To pay less crypto tax in 2023, you need to:

• • Capitalize on tax-free slabs.

• • Invest your crypto in a pension fund.

• • Donate your crypto to a registered charity.

• • Gift crypto to your spouse.

• • Make investments in opportunity-zone funds.

• • Learn to detect unrealized losses.

• • Make use of losses to pay less tax on future gains.
    
    

The business of crypto trading

For a business that deals with crypto transactions, tax rules are a bit complex. As a crypto business, you might have to pay Capital Gains Tax, Corporate Tax, VAT, etc. depending on the transaction. Even if you are a freelancer dealing with crypto, the HMRC would count you as a business entity. It all depends on the scale of your crypto transaction.

The HMRC works in tandem with certain crypto firms like Coinbase, CEX, and eToro. They could be working with several other crypto platforms like Kraken, CoinJar, KuCoin, Binance, Bittrex, etc. It is much easier for the HMRC to exchange transaction details from centralized exchanges than decentralized ones. The HMRC can get your crypto transaction details by using the KYC data from centralized exchanges. DeFi exchanges don’t use KYC in the first place, so it is much more difficult for them to access your data.

How can Finanche help?

We have expert accountants on hand to help you navigate the complicated crypto tax rules. Contact us today for a free non obligatory chat.