Crypto tax UK: How to work out if you need to pay

From Bitcoin to Shiba Inu, cryptocurrencies have been blowing up (and down) over the last few years. But in the grand scheme of things, all these tokens are fairly new, and the world’s lawmakers are still working out what to do with them. We've compiled some key pointers on how cryptocurrency is taxed, but there are some further complexities to account for.

So, do you need to pay crypto tax in the UK? It all depends how you’re earning your crypto and how much profit you’re making. 

But before we dive into the details, let’s start with the biggest question of all.

Is there a crypto tax in the UK?

No, HMRC doesn’t have a specific crypto tax in the UK. This is because HMRC sees cryptocurrency as exchange tokens rather than a form of money. But that doesn’t mean you don’t have to pay tax on crypto.

Broadly speaking, there are two types of crypto tax you need to look out for in the UK:

• Income Tax
  If you earn over £12,570 per year and make additional income in crypto.

• Capital Gains Tax
  If you make over £12,300 in profit when selling, swapping, gifting or spending crypto.

Let’s start with Income Tax.

When you need to pay crypto tax as Income Tax

If you earn crypto in the UK, you’ll need to pay Income Tax and National Insurance on it – just like you do when you get paid in £GBP.

Here are the five scenarios where you need to pay Income Tax on crypto:

1. Getting paid by your employer in crypto
   This is still seen as income in the eyes of HMRC, even though your employer is using a form of non-cash payment.

2. Mining for crypto
   If you use a computer to verify transactions in the blockchain, any rewards you receive are classed as miscellaneous income.

3. Staking for crypto
   If you earn rewards from staking crypto, any tokens you’re awarded are classed as miscellaneous income.

4. Receiving airdrops
   If you receive airdropped crypto in exchange for carrying out a service, this will be classed as miscellaneous income.

5. Trading crypto
   HMRC’s guidance on trading for individuals is quite woolly. But if you trade huge amounts regularly with a high level of organisation and sophistication, your profits may be subject to Income Tax.

If the value of your crypto keeps rising, you may also need to pay Capital Gains Tax on the profits when you exchange it for £GBP. 

We’ll talk more about when Capital Gains Tax is due a little bit later. But first, let’s work out how much Income Tax you’ll need to pay.

How much crypto tax you need to pay as Income Tax

If you already earn over the personal allowance of £12,570, you’ll need to pay at least 20% tax on your crypto income.

Let’s look at how you can work out your crypto tax liabilities for income in three simple steps.

1. Find out how much of your crypto is classed as income by HMRC

Here’s a quick reminder of crypto earnings that are classed as income:

• Getting paid by your employer in crypto
• Mining for crypto
• Staking for crypto
• Receiving airdrops in exchange for services
• Trading extraordinary amounts of crypto

Once you’ve written down which crypto tokens you need to pay Income Tax on, you need to work out how much they were worth on the day you received them.

2. Calculate the Fair Market Value (FMV) of your crypto income

The next step is to work out the value of your crypto income at the date and time you received it. This helps to give you an accurate idea of your crypto’s value in relation to £GBP.

You can do this using Koinly’s UK crypto tax calculator.

3. Check which rate of tax you need to pay

Now that you’ve got a number in £GBP for your crypto income, you can add this to any other earnings to work out your total taxable income. This will give you your crypto tax rate.

You can find the tax bands for 2022-23 in the table below:

So if you earn £55,000 from regular employment and £5,000 in crypto, you’ll need to pay 40% tax on your crypto income because you’re a higher rate taxpayer. Once you have a rough idea of your total income, you can use the HMRC pay calculator to work out how much tax you’ll need to pay.

As a reminder, you may also need to pay Capital Gains Tax if you make profit on your crypto. Keep reading to find out if this applies to your situation.

When you need to pay crypto tax as Capital Gains Tax

Crypto is seen as an asset in the UK. So if you sell, swap or send it, HMRC sees it as a taxable event. That’s where Capital Gains Tax comes into play.

Everyone in the UK has a Capital Gains tax-free allowance of £12,300. So if your crypto profits are under £12,300, you won’t need to pay Capital Gains tax or report your crypto profits.

Here are the four scenarios where you need to pay Capital Gains Tax on crypto profits:

1. Selling crypto in exchange for £GBP
   If you sell your crypto for more than you bought it, you’ll need to pay Capital Gains tax on the difference (profits).

2. Swapping crypto for crypto
   If you swap one crypto token for another, you’ll need to pay Capital Gains tax on any profits you made between buying and swapping the original token.

3. Gifting crypto (except to your spouse or civil partner)
   If you give crypto as a gift, you’ll need to pay Capital Gains Tax on any profits you made between buying it and giving it away.

4. Using crypto to buy goods and services
   If you spend your crypto, you’ll need to pay Capital Gains Tax on any profits you made between buying and spending it.

Quick tip: It doesn’t matter if your profits were made over three hours or three years. You’ll still pay the same amount of Capital Gains Tax.

How much crypto tax you need to pay as Capital Gains Tax

If you make more than £12,300 profit on your crypto within the tax year, you’ll need to pay at least 10% Capital Gains Tax on your profits.

Let’s look at how you can work out your capital gains liabilities in four simple steps.

1. Find out which transactions are classed as profit by HMRC

Here’s a quick reminder of crypto earnings that are classed as profit:

• Selling crypto in exchange for £GBP
• Swapping crypto for crypto
• Gifting crypto (except to your spouse or civil partner)
• Using crypto to buy goods and services

Once you’ve written down which crypto transactions you need to pay Capital Gains Tax on, it’s time to work out the profit.

2. Calculate your cost basis for each crypto transaction 

Your cost basis is the amount you paid for your crypto, plus any transaction fees.

So if you paid £20,000 for 1 BTC and had to pay £150 in transaction fees, your cost basis would be £20,150.

3. Deduct the cost basis from the value of your crypto at disposal

Next, you need to work out how much your crypto was worth at the date and time you sold, swapped, gifted or spent it. Then subtract your cost basis to work out your profit.

So if your cost basis for 1 BTC is £20,150 and you sold it for £25,000, your profit is £4,850. This is also known as your “capital gain”.

4. Check which rate of Capital Gains Tax you need to pay

The crypto tax rate you need to pay in the form of Capital Gains Tax will depend on which Income Tax band you’re in.

You can see the Capital Gains Tax rates in the table below:

So if you’re a basic rate taxpayer and make £15,000 in crypto profit, you’ll first need to deduct your £12,300 Capital Gains tax-free allowance. Then you’ll pay 10% Capital Gains Tax on the remaining £3,700.

What happens if you make a loss on crypto assets?

If you make a loss on any of your chargeable assets (including crypto), you may be able to reduce your total taxable gains.

You can claim losses any time within four years from the end of the tax year in which the loss was made.

Are any transactions exempt from crypto taxes in the UK?

Yes, there are four crypto transactions that aren’t subject to Income Tax or Capital Gains Tax.

They are:

1. Buying crypto with fiat currency like £GBP
2. Holding (or HODLing) your crypto
3. Transferring crypto between your own wallets
4. Gifting crypto to a spouse or civil partner

Other ways to avoid or reduce your crypto tax in the UK

Just like getting paid or making profit in £GBP, it’s only natural to look for ways to minimise your taxes.

Here are some ways you can legally avoid paying crypto tax in the UK:

• Take advantage of tax-free thresholds
  You can make £12,570 a year before you need to pay Income Tax, and £12,300 in profit before you need to pay Capital Gains Tax.
  
  
• Pool your tax-free thresholds with your spouse or civil partner
  Transfers between spouses and civil partners are tax-free in the UK. This means you can gift crypto to your partner to reduce your personal liabilities, effectively doubling your tax-free thresholds to £25,140 for Income Tax and £24,600 for Capital Gains Tax.
  
  
• Use the UK’s trading tax break
  If you earn less than £1,000 in crypto income, you don’t need to declare your crypto tax to HMRC – even if you earn more than the £12,570 threshold in regular income.
  
  
• Invest your crypto into a pension
  As with all income, investing into a pension is a great way to reduce your personal tax liabilities. This process isn’t straightforward in the UK, but things are changing all the time. So if you’re interested in investing in crypto long term, chat to a financial advisor.
  
  
• Donate crypto to charity
  If you regularly give to charity or don’t need all the profits from your crypto investments, you can donate your crypto to charity. This can be a great way to reduce some of your Capital Gains Tax burden.

How to get ready for crypto tax season in the UK

Here are three ways you can get ready to pay tax on crypto:

1. Keep track of all your crypto tax transactions
   When preparing your crypto tax documents, you’ll need to report on any income or profits you’ve made. So keep a record of everything, including the equivalent value of your crypto in £GBP when you bought, sold, swapped, gifted or spent it.
   
   
2. Use crypto tax software designed for the UK
   Tools like Koinly, TokenTax, and CoinTracker can scrape data from exchanges to help work out your tax bill. Some tools also include a free crypto tax calculator for the UK to help you work out your profits and liabilities.
   
   
3. Get crypto tax advice from a UK-based accountant
   If you’ve been on a bull run and are looking at some serious income or profits, your best bet is to get crypto tax advice from an accountant. This will help you take advantage of the best legal loopholes for your situation.

When to file crypto taxes to HMRC in the UK

The UK deadline to report and pay crypto tax is midnight on 31st January. But since the reporting and payment deadline is one in the same, it’s always a good idea to report your taxes in advance. This gives you a bit of a buffer before you need to pay the bill.

When filling out your Self Assessment, you’ll need to report all your income and profits. This will tell you how much you need to pay in Income Tax, National Insurance, and Capital Gains Tax.

Are there any crypto tax-free countries?

Yes, but unfortunately the UK isn’t one of them – though it does offer decent tax-free allowances for Income Tax and Capital Gains Tax.

Many countries are partially tax-free when it comes to crypto. Germany, for example, doesn’t charge tax on profits from crypto sales if you hold your crypto for over a year. 

Here are the top 10 crypto tax-free countries:

1. Germany 
2. Belarus
3. El Salvador
4. Portugal
5. Singapore
6. Malaysia
7. Malta
8. Cayman Islands
9. Puerto Rico
10. Switzerland

A quick disclaimer: crypto regulation is moving at lightning pace, so these countries may have introduced new crypto tax liabilities since this was written. If you’re thinking of investing in crypto overseas, double check the latest local regulations.