Crypto – How is it Taxed in the UK?

For many governments around the world, they’re still getting to grips with how crypto transactions should be taxed and the UK isn’t an exception. On one hand, you have crypto tax havens like Portugal which has an effective nil tax rate for capital gains on crypto, which is very different from India on the other hand, which has its own controversial crypto tax.

We caught up with our Crypto expert at UHY, James Foster, to find out more about how it is taxed in the UK.

So how is Crypto Taxed in the UK?

So where does the UK sit? Well, it’s probably best to say that we’re somewhere in between. We’re not a tax haven (although the government wants to make the UK a cryptoasset hub), but we also don’t have our own crypto tax. Instead in most cases, we use variations of existing tax frameworks to determine what tax rate should apply to crypto transactions.

So this should be simple, right? Unfortunately not, as there are many different types of crypto transactions, like mining, staking and airdrops for example. Often these types of transactions don’t have a clear counterpart activity that you can point to with normal fiat currency trading to determine how it should be taxed.

Income or Capital?

When it comes to what tax should apply to a crypto transaction – the question that we’re usually asking is: is this transaction income or a capital gain? Well, let’s look at both income and capital gains when it comes to crypto…

Income:

In general, if HMRC views you to be earning income from crypto, you’ll pay income tax at your income tax band (20%, 40% or 45%). The types of transactions that are classed as income are:

• Activities that generate a return, such as yield farming, staking and lending (although, it depends on the nature of the activity).
• Getting remunerated in crypto – as cryptocurrencies are seen as Readily Convertible Assets (RCAs), any payments in crypto would be subject to not only income tax but also national insurance contributions, so employers and recipients should be aware of this.
• Mining tokens.

Capital:

HMRC view crypto as a capital asset, so if you’re exchanging or selling crypto for a gain, this gain would be subject to Capital Gains Tax (CGT). The types of crypto transactions that could trigger a capital gain include:

• Trading/exchanging the crypto for another form of crypto.
• Selling the crypto for a fiat currency like GBP.
• Spending crypto on goods and services. You may be wondering why? Well, as you’re effectively disposing of the crypto at this point, you would recognise any gain on the crypto when you spend it (so no loopholes here!).

For the 2022/23 tax year, capital gains are taxed at either 10% (basic rate income band) or 20% (higher & additional rate bands), but you also have a tax-free allowance of £12,300.

However, this is just general guidance and there are some transactions, such as DeFi transactions or airdrops where they can be classed as either income or capital gains dependent on the nature of the transaction. Therefore, professional advice and guidance should always be sought.

How can I track my crypto trading?

Over the course of a tax year, if you’re investing in and trading crypto, you may find it a very manual task trying to collate this information for your tax return, especially if you have a high volume of trades and wallets. Luckily, there’s software available that allows you to link your wallets and exchanges, so all your transactions are pulled into the software so it can produce a tax report for you to use in your tax return.

How we can help?

The world of crypto is constantly evolving – at the time of writing, since HMRC published their cryptoassets manual in March 2021, there have been 11 published amendments. Therefore, it’s important that either you or your professional advisers stay informed.

With the Recruitment Accountants, we have tax partners and specialists that follow these updates and understand the different tax implications that can arise with crypto, and using market-leading software, we’re able to help you track your portfolio and the taxes you owe.

If you have any questions about this, please call our friendly team on 0845 606 9632 or email hello@recruitmentaccountants.com.