How is cryptocurrency taxed in the UK?
Cryptocurrency remains a rapidly growing area of interest for many traders, investors and industry regulators. Its popularity has attracted the attention of HMRC, who has updated guidance. This is to ensure investors are paying the correct amount of tax. This includes sending nudge letters to individuals and opening tax investigations.
If you own cryptocurrency like Bitcoin (or any other form of cryptoassets), ensuring your assets are held in a tax-efficient manner is understandably a priority. In this guide, we look at some of the tax implications of owning, selling or trading cryptoassets.
Our specialist tax advisors can be contacted to discuss how we can best assist you, based upon your individual circumstances and needs. We are one of the UKs leading tax advisors for Crypto related issues. We advise both individuals and businesses on the tax and accounting implications of crypto. Please contact us for further details.
Cryptocurrency tax in the UK explained
Before diving into the world of cryptocurrency tax in the UK, it’s important to note that HMRC does not consider any form of cryptoassets (from Bitcoin to Ethereum) to be currency or money. They also do not consider the buying and selling of cryptoassets to be the same as gambling.
To tackle the issue of tax on cryptoassets, HMRC has broken them down into three distinct types of assets in their Cryptoassets Taskforce report:
Exchange tokens – often referred to as ‘cryptocurrencies’ such as Bitcoin or other equivalents.
Security tokens – amounting to a ‘specified investment’ as set out in the Financial Services and Markets Act (2000). These could provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profits. Utility tokens – which are able to be redeemed for access to a specific product or service that is typically provided using a DLT platform.
How you are taxed on cryptocurrency will depend on how you are using the tokens. As cryptocurrency remains relatively new area of taxation, the tax treatment of such tokens is tackled by HMRC on a case-by-case basis. HMRC will look at your individual case when determining any taxable liability, but it is likely these views may change as this ever-growing sector continues to evolve. You can read more about this on our cryptocurrency tax page.
Who is liable for cryptoasset tax in the UK?
Essentially, anyone who is a tax resident in the UK is liable to pay tax on cryptoassets. UK Businesses are also liable to pay tax on cryptoassets.
If a person is a tax resident in the UK, then it is deemed by HMRC that any cryptoassets they hold are also located in the UK and therefore liable for UK tax.
Tax would be payable when cryptoassets are traded, received as payment, mined (including tax on fees earned from mining) or received as airdrops in lieu of a service (or expected service).
Tax is also due when a cryptoassets are exchanged for another type of cryptoasset.
What taxes might I need to pay?
You are likely to be liable to pay Capital Gains Tax, when any cryptocurrency is traded, disposed of or exchanged. This is where crypto is deemed as being held for investment. Where crypto is deemed to be held for trading purposes, gains are likely to be liable for income tax.
You may also be liable to pay Capital Gains Tax when you use cryptocurrency to pay for goods or services or where these are given away to another person (other than a spouse).
Income Tax and National Insurance contributions are also payable in circumstances where cryptoassets have been received as a salary, through mining or through Airdrops in return for a service or expected service. Inheritance Tax may also be due upon death so Inheritance Tax Planning should also be considered.
If you’re a higher or additional rate taxpayer, your cryptoassets will be taxed at the current Capital Gains Tax rate of 20%. Basic rate taxpayers will be taxed differently depending on their taxable income.
For businesses involved in cryptocurrency transactions, the rules around taxation are much more complex. Businesses may also be liable for VAT depending upon the type of transaction. Contact our tax advisors for further information.
More detailed information on the tax treatment of crypto and available reliefs is available on our cryptocurrency tax page.
Claiming losses against crypto
Where crypto is taxable as a capital gain, losses can typically be offset. These can be offset against gains in the same, or potentially future tax years.
As is the case with gains, from a tax point perspective, to utilise losses, they first need to be realised through a disposal. For example, transferring them (to an unconnected party) or through a sale.
At its simplest level, losses can be offset against gains made in the same tax year. If total taxable gains are above the tax-free allowance after factoring in losses made in that tax year, unused losses from previous tax years can also be deducted. This is subject to certain conditions. If they reduce the gain within the tax-free allowance, remaining losses can be carried forward to a future tax year. Read more on this here.
Industry-leading cryptocurrency tax advice
To fully understand how cryptocurrency is taxed in the UK, and how to stay compliant in this rapidly evolving sector, our cryptocurrency tax advisors can assist.
Our team at Alexander & Co is experienced in dealing with the tax issues surrounding cryptocurrency and cryptoassets. Whether you’re an investor, trader or a business, we can help you. We will ensure your affairs are structured correctly, in the most tax-efficient way, while remaining compliant with HMRC.