Cryptocurrencies are not considered legal tender or money in the UK but as assets. When you trade in cryptocurrency, you are bound to profit or lose by disposing of the crypto asset.
In the UK, His Majesty’s Revenue & Customs (HMRC) oversees all tax collection, payment, and administration. To stay compliant with the crypto taxes, you must accurately report your earnings to HMRC when engaging in crypto transactions. Trading in cryptocurrency makes you liable to pay income tax in the UK.
On the other hand, when the cryptocurrencies are disposed of through selling, exchanging, or gifting, resulting in a profit, this is subjected to Capital Gains Tax (CGT). Hence, this article will discuss how cryptocurrency gains are taxed in the UK.
Capital Gains Tax In The UK
The treatment of crypto assets depends on how you report them to the HMRC. The profits or gains from crypto transactions can be classified as income or capital gains. The type of tax you need to pay on such gains depends on the type of transaction. Earning profits from selling crypto are categorised as capital gains, attracting Capital Gains Tax.
On the other hand, income from a business activity or full-time occupation is treated as income, subject to Personal tax.
Understanding Capital Gain Tax
Capital gain tax in the UK applies to the profits earned from selling assets, including cryptocurrencies. Therefore, any income from disposing of the crypto will attract a capital gain tax.
In the UK, individuals’ transactions involving buying, holding, and selling crypto are considered investment activities and subject to capital gains tax. The capital gain allowance for the year 2023-24 is £6,000. This means that any profit above this allowance will attract capital gain tax.
If you are just holding the crypto, there will not be any tax liability. The liability will be incurred only when the crypto is disposed of. Disposal is a broad term wherein it includes all transactions where the number of cryptos held by an individual gets reduced, including:
- Selling crypto for money
- Exchanging one type of crypto for another
- Paying crypto for goods or services,
- Giving away crypto to another person (other than a spouse or civil partner)
Crypto Capital Gains Tax Rates In The UK
All capital gains are taxed under the same tax rates as income tax in the UK. The tax rates are based on the following income bands:
|Table Header||Table Header|
|Tax Rate||Taxable Income|
|10%||If your income is up to £50,270, i.e., falls under the Basic Rate Income Band.|
|20%||If your income is up to £150,000, i.e., falls under the Higher Rate Income Band.|
|20%||If your income exceeds £150,000, i.e., falls under the Additional Rate Income Band.|
Thus, if your earnings are under £50,270, your tax rate would be 10%, and if your payments are over £50,270, your tax rate would be 20% on your crypto gains.
Under Capital Gains Tax-Free Allowance, no tax is applicable on income of £6,000 after April 2023 and £3,000 after April 2024.
How To Calculate Tax On Crypto Gains In The UK?
When crypto is disposed of, the result could be a gain or a loss depending on your cost basis of the units disposed of and the value/price of the crypto at the time of disposal.
To calculate tax on crypto gains, determine your cost basis, which includes the original price, transaction fees, and fair market value if acquired through airdrops or forks.
Here’s a step-by-step guide:
- Calculate your cost basis: Original price + Transaction fees (or fair market value for airdrops/forks).
- Determine the asset’s selling, swapping, spending, or gifting price.
Capital Gain = Disposal price – Cost basis
Cost basis = Cost of the Crypto + Allowable Expense (like transaction fee)
UK Cost Basis Methods
In the UK, the cost basis of crypto is calculated using a method known as the share pooling method. The share pooling method has three rules, which are applied in the following order:
1. The Same-Day Rule
Under this rule, all the tokens/coins are considered to be purchased in a single transaction and also sold in a single transaction on that day.
You move to the next rule if the number of coins/tokens purchased exceeds the coins sold or if the sales are more than purchases.
2. The 30-Day Rule
When the same kind of tokens are purchased and sold within 30 days, the cost basis for the 30 days is applied. It’s similar to the FIFO method applied to purchasing and selling tokens.
Once again, you move to the next rule if the number of coins/tokens purchased exceeds the coins sold or if the sales are more than purchases.
3. The Section104 Pool
The Tokens remaining in the pool after applying the above rules become part of Section 104 Pool. The cost basis of tokens in Section 104 Pool is calculated based on the average cost method, where the allowable costs of all tokens in the pool are divided by the total number of tokens in the pool to determine the cost basis per token.
Once the cost basis is ascertained by applying any of the above rules, the gain or loss can be calculated using the following formula:
Gain or (Loss) = Total Revenue from Sale – Cost Basis of the Token Sold
If there is a gain, capital gain tax has to be paid after accounting for the capital gain allowance limit (£6,000), and if there is a loss, you need not pay any taxes.
Tom invests £12,000 in crypto. After a few months, he sold his investment for £20,000. The difference of £8,000 is a capital gain and will attract a capital gain tax. Tom’s other earnings amount to £120,000.
Since the total income is less than £150,000 (£120,000+ £8,000), 20% CGT will be applicable on the gains from crypto. Therefore, the tax liability on crypto gains is £1,600.
Offsetting Capital Gains With Capital Losses
Sometimes, you may suffer losses on your investment. In such scenarios, you do not have to pay capital gain taxes. It’s crucial to keep detailed records of these losses and register them with HMRC, as you can offset capital losses against capital gains and carry forward registered losses to offset future gains.
So, you must register your capital losses with HMRC while submitting your tax return. The time limit for reporting capital losses is four years, but it is advisable to register your losses within the same financial year. By registering your capital losses timely, you can carry forward them to future years, resulting in a deduction of your capital gains tax.
Luckily, in the UK, there isn’t any limit on the amount of losses for offsetting against your gains. Hence, you can use as many loss transactions as possible to offset the gains, thereby bringing the gains down to the Capital Gains tax-free zone, i.e., £12,300. This way, your tax liability on gains becomes zero.
If you’re earning profits from cryptocurrency in the UK, you may be liable to pay taxes. Understanding the tax implications of your crypto gains is essential to stay compliant with HMRC regulations. Crypto gains can be subject to capital gain tax or income tax, depending on the nature of your transactions.
But calculating and paying such taxes can consume much of your time. This is where KoinX comes in. We are a crypto tax platform that can help you compute and file your taxes in the UK. So why wait? Contact us today and make your crypto taxes easier than before.