Crypto Taxes in the UK
Digital money was once an obscure idea. Today, the UK crypto market is thriving as more investors and traders see the potential for profit. There are many ways you can make money with crypto, whether it’s mining, holding, or trading.
Regardless of which you choose, you’ll end up filing crypto taxes. UK regulation around crypto assets still doesn't cover everything, but HM Revenue & Customs has clear guidelines about paying crypto taxes.
If you're making money from crypto, it's essential to know everything about how to pay your taxes accurately. In this article, we'll cover all the details, including how to avoid crypto taxes. UK investors and traders, you’ll be glad to know, have several potential options available to them.
What Is Cryptocurrency?
Let’s take a step back before discussing filing crypto taxes. UK crypto users number two million, and that figure is constantly on the rise. But even though buying and trading crypto has become more and more prevalent, many people are unfamiliar with it.
Cryptocurrency or crypto assets constitute digital money. It can be challenging to imagine money having value if you don't see it in a physical form, but all other mediums of exchange except cryptocurrency are "real" money. You can only buy items and pay for services with cryptocurrency.
However, what sets cryptocurrency apart from fiat currency is the peer-to-peer transaction system. There is no centralised authority that oversees anything that happens on the blockchain, but every transaction is part of the public record for the sake of transparency.
There are thousands of cryptocurrencies in existence, and more are introduced all the time. But everything started with Bitcoin in 2009, and to this day, it's still the biggest and most valuable digital currency in the world.
The value of any cryptocurrency is determined by supply and demand, which makes them speculative and unpredictable. Still, the future of crypto assets seems bright, regardless of looming regulations around the world.
Is Cryptocurrency Legal in the UK?
The good news is that cryptocurrencies are legal in the UK, even if they aren’t legal tender. According to HMRC, crypto assets are not a currency but property or tokens. As such, they can be divided into four separate categories:
However, if you’re wondering how does buying Bitcoin work on other platforms, the answer is that all the steps are pretty similar to the following:
- Exchange tokens: A type of cryptocurrency that can be used as payment. The most well-known example is Bitcoin.
- Utility tokens: A type of cryptocurrency that allows the holder to access specific goods and services on the platform, typically using Distributed Ledger Technology (DTL.)
- Security tokens: A type of cryptocurrency with particular interests in a business. For example, an entitlement to a share in future profits.
- Stablecoins: A cryptocurrency with limited volatility and pegged to another asset with more stable value.
Filing Crypto Taxes UK – An Overview
Whether you're buying Bitcoin, Litecoin, or Ethereum, it's essential to be informed about crypto tax laws. But you might even be wondering how to avoid crypto taxes. UK crypto users should first know about the variations in the tax you pay on crypto. It’s all about the manner in which you’re using it.
If you're trading crypto as a business or receiving crypto assets as a salary, you must pay Income Tax. However, if you're buying crypto as a personal investment, the profits will be subject to Capital Gains Tax.
The tax regulations are also different when you’re a crypto miner and filing crypto taxes. UK crypto miners who receive coins casually need to file it under miscellaneous income and also requires you to pay Capital Gains Tax. On the other hand, if you’re a business crypto miner and make a profit of over £1,000, it’s subject to Income Tax.
But when talking about crypto taxation in the UK, we have to mention several other taxable scenarios.
In 2021, the tax-free allowance of each resident is £12,570. If you gift your spouse cryptocurrency, therefore, your allowances will increase as well. Another important taxable occurrence is crypto forks.
That happens when miners reach a hard fork on the blockchain, and a new coin is produced as a result. When that happens, the new coin is considered a new crypto asset and is taxed separately.
How to File Crypto Taxes in the UK
What are you supposed to do precisely when filing crypto taxes? UK traders, business miners, and those receiving wages in cryptocurrency are subject to Income Tax. Same as any other citizen, you have to declare your income to HMRC.
You've likely done that before, but in case you haven't, it's a reasonably straightforward process. You have to report your crypto profits via the Self Assessment form. Once you fill it out, HMRC will send you all the details regarding the payment method.
However, if you're a crypto investor, you'll need to pay Capital Gains Tax that exceeds the tax-free allowance for every UK citizen. How much you'll pay depends on your income tax bracket. You can report your capital gains using the Capital Gains Tax service in real-time or use the Self Assessment form.
How to Avoid Crypto Taxes UK?
If investing or trading cryptocurrency is a hobby for you, then paying a small miscellaneous income tax fee probably won’t be a big problem.
But if you’re a savvy investor or trading crypto as a business, then you’re probably curious about how to avoid crypto taxes. UK crypto users can't actually avoid paying taxes altogether, as that would be illegal. When it comes to cryptocurrency, tax avoidance is a serious issue, just as it is with fiat currency.
Therefore, it might be better to ask whether you can minimise crypto taxes instead of focusing on how to avoid crypto taxes. UK crypto investors subject to Capital Gains Tax have several options to consider.
Making the Most of Tax-Free Allowance
If unused, the tax-free allowance, also known as Capital Gains Tax allowance, isn't carried forward into the following year.
Accordingly, investors are advised to make gains on investments up to £12,570 to reduce the risk of paying a much more significant Capital Gains Tax the following year.
Count the Losses
Selling crypto assets is something most investors won’t do. However, if the overall profit gain during the following year exceeds the tax-free allowance, selling at a loss might be the best strategy.
You have to make a note of your losses, too, when filing crypto taxes. UK investors must register losses within four years from the year they occurred. That allows them to deduct specific fees related to buying and selling cryptocurrency.
If you choose to make a pension contribution, the tax on your capital gains can be reduced anywhere from 10-20%.
This is an excellent option for all the crypto traders and miners that are subject to Income Tax. The gross amount you contribute to the pension fund will change the upper limit of your income tax band.
What Are the Risks of Investing in Cryptocurrency?
The entire cryptocurrency sector is complicated, and it's not just about figuring out how to avoid crypto taxes. UK crypto users, as mentioned above, number in the millions, ranging from hobbyists to those who make sizeable sums from it.
There is no doubt that buying and selling cryptocurrency is popular, but it's not without risk. There are scams to be wary of, not to mention that most digital currencies are quite volatile.
None of that is a deterrent, though, as these issues are merely one side of the figurative crypto coin. Hence, the focus and emphasis are more on choosing the right cryptocurrency to invest in and making sure you're using regulated exchanges and safe digital wallets.
So, how do you choose a cryptocurrency that will pay off? That's nearly impossible to answer, but doing extensive research is the most critical part of the process.
You should check out the history of digital currency and the team behind it. Also, if you have a basic comprehension of blockchain technology, looking for the coin that stands out from the crowd may pay off.
If you're worried about the environment, investing in cryptocurrency with a lower carbon footprint might be the best investment. Finally, you have to pay attention to the pricing history of the cryptocurrency.
For the most part, past behaviour is the best indicator of future behaviour. The resilience of the crypto asset is significant. If the cryptocurrency is at its all-time high value, perhaps wait for the first decrease in price before investing.
Paying the Crypto Taxes
Keeping thorough records of all crypto investments and trades will make filing your taxes much easier each year. It will also prevent you from thinking about how to avoid crypto taxes. UK investors and traders have several practical options to minimise the amount they pay.
But trying to avoid crypto taxes is futile, as HMRC is active in ensuring traders pay their share. Principally, they ask major exchanges for information on UK-based users.
Paying crypto taxes is a pretty straightforward process. And remember, even if you’ve suffered a loss, your tax return should reflect it.