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.
Crypto Transactions That Attracts Capital Gains 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 that includes all transactions where the number of cryptos held by an individual gets distributed. Here’s a list of transactions that are categorised under crypto disposal, and therefore are liable for Capital Gains Tax:
Disposing of Crypto for GBP or Another Fiat Currency
One of the most common instances when UK crypto investors face CGT is when they sell their crypto for fiat currency, such as GBP. Whenever you dispose of your digital assets by selling them for traditional currency, it triggers a CGT event.
The difference between what you paid for the cryptocurrency and what you sell it for determines whether you have a taxable gain. You’ll likely owe CGT on the profit if the value has increased. However, you can offset your losses from other assets to reduce the overall tax liability. Always keep detailed records of your transactions to ensure accurate reporting.
Swapping Crypto for Another Cryptocurrency or Stablecoin
Trading one cryptocurrency for another is also considered a disposal event for tax purposes. Whether you’re swapping Bitcoin for Ethereum or converting crypto into a stablecoin like USDT, the transaction will likely attract CGT.
Even though you’re not converting the digital assets into fiat currency, the value of the crypto at the time of exchange matters. HMRC treats these swaps the same way as a sale in terms of fiat currencies. You will need to calculate the market value of the crypto at the time of the transaction to determine if a capital gain has occurred.
Using Crypto to Purchase Goods and Services
If you use your cryptocurrency to buy goods or services, this too counts as a taxable event. In the eyes of HMRC, spending your digital assets is equivalent to selling them, meaning any increase in value from the time you acquired the crypto to the time you spent it will be subject to CGT. Whether you’re buying a car or simply paying for a meal, every purchase made using cryptocurrency could result in a tax liability if there’s a gain.
Gifting Cryptocurrency—Except to Your Spouse or Civil Partner
Gifting crypto is another scenario where you could be liable for CGT. If you give cryptocurrency to anyone other than your spouse or civil partner, the act is considered a disposal, which may attract CGT.
This includes gifts to family members, friends, or charitable donations. However, if you’re gifting the assets to your spouse or civil partner, this is exempt from CGT, providing a tax-efficient way to transfer assets. Keep in mind that even gifts need to be recorded for tax purposes.
DeFi Transactions That Attracts Capital Gains Tax
When investing in decentralised finance (DeFi) in the UK, it’s important to understand the tax implications of your transactions. HMRC has released guidance that DeFi transactions may be subject to either Income Tax or Capital Gains Tax, depending on the nature of the transaction. For UK investors, knowing when CGT applies is key to avoiding unexpected tax bills.
Adding or Removing Crypto in a Liquidity Pool
One common DeFi transaction that may attract CGT is adding or removing cryptocurrency from a liquidity pool. If the protocol you’re using benefits from your contribution, HMRC might view this as a “disposal” of your crypto assets.
Essentially, even though you might still have the right to reclaim your crypto, the act of providing liquidity could trigger a taxable event. UK investors should keep detailed records of these transactions, as any gains made from the change in value when you remove your liquidity could be subject to CGT.
Staking Crypto Through a DeFi Protocol
Staking your crypto is another transaction that might attract Capital Gains Tax, but this depends on the circumstances. While the return on your staked assets is usually taxed under Income Tax as earnings, the initial staking process itself might be seen as capital disposal.
If the nature of the transaction is considered capital rather than income, you could face Capital Gains Tax on any profit made when you withdraw or transfer your staked crypto.
Crypto Capital Gains Tax Rates In The UK
In contrast to numerous other countries, the UK does not have separate tax rates for short-term and long-term capital gains; instead, all capital gains are taxed uniformly. The amount of Capital Gains Tax you will owe is based on your total income.
Starting in 2025, you will be subject to either a 10% or 20% tax on any profits from cryptocurrency, depending on your income bracket. This structure means your overall earnings will affect the tax rate applied to your crypto gains.
The tax rates are based on the following income bands:
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.
Tax allowance
For the 2023-2024 financial year, HMRC reduced the Capital Gains Tax allowance from £12,300 to £6,000. This allowance was further halved to £3,000 for the current 2024-2025 financial year.
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.
Real-Life Scenario
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.
Conclusion
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.
Frequently Asked Questions
Can HMRC Track My Crypto Gains?
Yes, HMRC can track your crypto gains. They use various data sources and reporting requirements to identify individuals engaging in crypto transactions. This includes working with exchanges to obtain information on user activities. Therefore, it’s essential to maintain accurate records of your trades and report any taxable gains accordingly.
Do You Need To Pay CGT On Crypto Wallet Transfers?
No, you do not need to pay Capital Gains Tax on transfers between your crypto wallets. Such transfers are not considered taxable events, as there is no disposal of assets. However, once you sell or exchange cryptocurrencies, any gains made from those transactions will be subject to CGT.
What Is The Best Cost Basis Method To Calculate CGT In The UK?
HMRC recognises the Share Pooling or Average Cost Basis Method as the best approach for calculating Capital Gains Tax on crypto assets. This method allows you to calculate your gains based on the average cost of your assets, simplifying the process and helping you ensure accurate tax reporting.
What Is The Tax-Free Allowance For FY 2024-25?
The tax-free allowance for the financial year 2024-25 is set at £3,000. This means you can realise gains up to this amount without incurring any Capital Gains Tax. If your gains exceed this threshold, you will need to report the excess amount and pay any applicable taxes accordingly.
