Digital assets have a big user base in the United Kingdom, with its governments being one of the most clear and proactive when it comes to cryptocurrency taxing and regulatory policies, aligned with other leaders in crypto regulation like the United States, although not as friendly as territories like Portugal, who offer tax-free trading and mining for digital assets or Japan who consider Bitcoin a currency.
2020 was an hectic year for traders with accentuated volatility being felt in the aftermath of the Coronavirus pandemic and last year, the HMRC, U.K’s tax collection department, showed its intent of cracking down on digital asset taxes, sending information requests to exchanges like Coinbase among others.
With this in mind, we figured we would talk about tax law for cryptocurrency in the United Kingdom, how it works and how you can go about dealing with your taxes in the fastest and easiest manner, while still ensuring all the information filled is accurate and up to date.
Crypto tax law: How it works and what to expect
Similar to other countries, HMRC views cryptocurrency as an asset. Therefore, like stocks, these are subject to Capital Gains Taxes. This form of taxation is applied when an asset is sold, considering the profit made from said trade. This means that once a crypto asset is sold, the capital gains tax will be applied to the sum left from subtracting the price of the sale with the price at which the asset was bought.
The country’s tax authority considers any “disposals of cryptocurrency” as taxable transactions, including selling crypto for fiat, for other crypto assets, but also when a service or good is paid for with the assets or when said asset is gifted to another person or entity. The latter two require the individual to figure out the value of the asset at the time it was used to buy something or to give away to an individual who is not a spouse or civil partner.
It’s also worth noting that in cases where an asset has had different acquisition prices throughout the time, the taxpayer should use the “shared pooled accounting method” where an average price for the asset is derived from the total cost for all of the units divided by all the units acquired. Additional rules like the same-day rule and the 30-day “bed and breakfast” rule also apply.
For residents that are using a foreign exchange service, U.K. tax rules still apply and that payers can also deduct certain expenses related to selling their tokens such as transaction fees and others.
Income Tax and National Insurance Contributions
While most readers will only have to worry about Capital Gains taxes from buying and selling crypto, individuals are also required to pay Income Taxes and Tax and National Insurance contributions on cryptocurrencies that they receive in the form of a salary or payment for a good or service. This also applies to assets acquired through mining and airdrop/bounty campaigns.
It’s also worth noting that these two types aren’t mutually exclusive. For example, if an individual receives payment in the form of a cryptocurrency and sells it at a higher price then it was at the time it was received, then the sale of the asset will also result in a Capital Gains Tax.
For mining, the expenses of the operation will be deducted from the total revenue. If the miner chooses to keep their mined coins and then sells it at a higher price, Capital Gains taxes may also apply. As for airdrops, these may not be subject to Income Tax if they don’t require the user to perform any specific task, but they may still be subject to Capital Gains tax.
What’s taxed and how much
The HMRC digital asset taskforce has identified three types of asset class: Exchange, Utility and Security tokens. The former of which being classic coins like Bitcoin and the latter two being tokens usually offered in fundraising campaigns, with utility tokens usually serving a purpose in a platform or network and security tokens representing ownership in a company. Binance Coin (BNB) and Nexo (NEXO) are examples of utility and security tokens respectively.
When disposing of any of the assets described above, you’ll need to pay a capital gains tax and if being paid a salary or payment for a service or good, you’ll need to pay an Income Tax. The value of said taxes will depend on your annual income or tax bracket. If you are not sure about your tax bracket, this article may be helpful.
It’s also worth noting that cryptocurrency exchanges cannot provide users with a Capital Gains Report due to the peer-to-peer nature of cryptocurrencies which can be transferred without any intermediaries. As so, the workload of creating a Capital Gains tax report falls on the taxpayer, who must gather all of the information from all the trades in all of the exchanges or services used to buy and sell crypto assets.
Dealing with losses
It’s worth noting that the HMRC takes several forms of losses into consideration. Individuals may reduce their Income Tax load by offsetting losses from disposing of crypto at a loss against future profits or other income. The same applies to Capital Gains taxes themselves as individuals can reduce their overall gains by removing losses but these must be reported to the HMRC first.
The HMRC also takes into account things like losing your private keys or being scammed which are not considered valid “disposal” of your crypto assets.
How to fill your taxes (calc and tools)
There are a variety of tax tools that can be used to facilitate this process. For example, Ernst and Young have recently launched the Crypto Prep tool which, although only available for I.R.S. forms at the moment, shows just how popular cryptocurrencies are becoming, given E.Y.’s decision to create a tool just for this purpose.
However, there are a few tools out there that you can use to fill out your taxes, including Blockify, Cryptotrader.tax, Zeledger, among others. We hope this article was useful and if you’re still wondering if you really have to pay taxes on your crypto in the U.K., you should probably be in the safe and try to find out, even if you need to consult a specialist.