The crypto world is evolving at a faster pace, hence it is of prime importance to stay updated with the changing regulations on crypto taxes which can be challenging otherwise. For investors looking for a reliable source of information on capital gains tax on crypto in the UK, we have put together this comprehensive 2023 tax guide. By the end of this article, we are certain that you shall have all your capital gains tax questions answered.
How Is Crypto Taxed in the UK?
The UK government does not have a specific ‘crypto tax’, as HMRC doesn’t consider cryptocurrency a form of money. However, cryptocurrency is an asset frequently used in the UK for investments, payments, and so on.
Thus, depending on the use, UK residents dealing in crypto assets are liable to pay taxes on cryptocurrency. If you’re not a UK resident, the amount of tax due for you may differ from what this article describes.
All major exchanges and brokers working in the UK share their data with HMRC, so the smart policy for UK investors is up-to-date with crypto taxes. Under the current HMRC guidelines, there are two main taxes: income tax and capital gains tax.
You must pay income tax in the UK, if you earn crypto through means like being paid in crypto, mining for tokens, staking, and trading crypto assets. We have covered income tax on crypto in the UK in detail in another article.
Capital gains tax liability arises when you earn profits on buying, selling, or holding cryptocurrency on your own account. In the following sections, let’s take a deeper look at capital gains tax on crypto in the UK.
Capital Gains Tax on Cryptocurrency in the UK
The following sections cover the key aspects of crypto capital gains tax to simplify your life substantially. Interested readers can also check out the HMRC guidelines in this regard.
Capital Gains Tax Events
Following are the main taxable events where profits earned—not the overall income tax—are liable for a capital gains tax:
Selling crypto for fiat money
Swapping one crypto for another
Paying for goods or services using crypto
Gifting your tokens to another person (except your spouse or civil partner)
Applicable Rates
Unlike some other countries, the UK has the same taxation rates for short-term and long-term capital gains. The capital gains tax rate depends on your income tax band.
| Income Tax | Tax Rate |
|---|---|
| Basic rate income band (£12,571 to £50,270) | 10% |
| Higher rate income band (£50,271 to £150,000) | 20% |
| Additional rate income band (above £150,000) | 20% |
Tax-free Allowance
HMRC specifies an annual tax-free allowance of £12,300 (£6,150 for trusts) for capital gains. If your crypto investment activity earns you a profit above this TaxFree allowance, you have to report your profits and pay capital gains tax on them.
Note that for the 2023-24 tax year (i.e., beginning April 2023), this TaxFree allowance will come down to £6,000. From April 2024, this will be further halved to £3,000. These figures are changed by the government, so it’s vital to stay informed.
Capital Losses
If any of your crypto investments ended up in losses or your capital gains are below the TaxFree allowance, you don’t need to pay capital gains tax on them. In fact, you can offset capital losses against capital gains and even carry them forward to subsequent years.
HMRC doesn’t limit the amount or the time for carrying forward capital losses, it can be done indefinitely until fully utilised.
However, to carry capital losses forward to future financial years, you must register them with HMRC through the self-assessment form or written notification. HMRC allows taxpayers four years to register capital losses, but we recommend registering them in the year incurred.
Lost Crypto
If you lose your tokens because you’ve misplaced your private key, or if the tokens get stolen, HMRC doesn’t consider it a capital loss. However, in some cases, you can make a negligible value claim. If HMRC accepts the claim, the inaccessible tokens are considered disposed of and re-acquired. There are specific guidelines for this aspect which you need to consider.
Allowable Costs
HMRC allows taxpayers to deduct certain expenditures when calculating capital gains. So, your net gain would be the crypto assets price plus these allowable expenditures reduced from the asset’s selling price.
The allowable costs include the following:
Transaction fees before the transaction is added to a blockchain
Drawing up a transaction contract
Advertising fees
Valuation fees
You can also deduct a proportion of the pooled cost (explained below) of your tokens, but you can’t deduct costs which are already deducted against profits for income tax or costs of mining activities.
Cost Basis Method
Typically, investors make multiple trades over a year. To help calculate capital gains tax in such a situation, HMRC prescribes a cost-basis method known as share pooling.
This method prevents some investors from gaming the system by executing loss-making trades in a short period to present a false picture of gains and losses.
The share pooling method complements the fundamental ACB (adjusted cost base) method, where profits are considered on the cost of the asset plus the expense incurred on acquiring the asset (e.g., transaction costs).
HMRC specifies three steps in the following order to calculate the capital gains:
Same-day Rule: If buying and selling tokens occur on the same day, use the ACB method to calculate your gains (or losses). If you are selling more than you have bought on the same day, move to the next step.
30-day Rule: If selling and repurchasing the same tokens within 30 days, use the cost basis of tokens bought this month to calculate gains. If you are selling more than you have bought this month, move to the next step.
Section 104 Rule: Calculate the average cost basis for a pool of crypto assets by adding the total price paid for all tokens and dividing it by the total number of tokens. For instance, if you buy 100 tokens for £5 each, the total cost is £500. Then, you buy 300 tokens for £4 each, amounting to a total of £1200. Now, you have 400 tokens costing a total of £1700. The average cost per token is £1700/400 = £4.25. If you sell 150 of these tokens at £6 each, your capital gain is 150 x (£6 - £4.25) = £262.50.
Exemptions and Ways to Reduce Tax
Besides gifting crypto to a spouse or civil partner, some other crypto transactions are exempted from income tax or capital gains tax. These are:
Buying crypto with fiat currency
HODLing your crypto
Transferring crypto between your wallets
While everyone must pay their taxes, there are a few legal ways to minimise your crypto tax liability. We have covered a few methods earlier, such as utilising your TaxFree allowance and registering your capital losses. Here are a few other ways to do this.
Combine TaxFree Allowances with Your Spouse or Partner: Transfers between spouses and civil partners are not taxed in the UK. Thus, you can reduce your liability by gifting some tokens to your partner if they haven’t exceeded their TaxFree allowance.
Donate Profits to Charity: If you don’t need all your profits from crypto investments, you can donate some to charity. This can reduce part of your capital gains tax liability.
Invest in a Pension: You can reduce your personal tax liabilities by investing in a pension. Regulations for this in the UK can be tricky, but you can use a financial advisor’s help to plan this out.
Preparing for the Crypto Tax Season in the UK
As the deadline for both reporting and paying crypto taxes in the UK is midnight on 31st January (31st October for postal returns), it’s a good idea to report your taxes beforehand. For reporting, you must fill out the Self Assessment tax return (SA100 and Capital Gains Summary SA108), reporting all your crypto income and profits.
Additionally, for capital gains tax, you can use the real-time service to report your gains and losses as they are incurred.
There are some other steps you can take to prepare for the tax season.
Maintain Records
It’s not always easy to recall all the details when filling out the Self Assessment at the end of the tax year. To avoid issues, keep a record of all your transactions throughout the year. HMRC advises maintaining separate records for each transaction, including details like the type of tokens, date of disposal, number of tokens disposed of, number of tokens left, the value of tokens in GBP, bank statements, and wallet addresses.
Use Crypto Tax Software
Many online tools, such as Koinly and TokenTax, scrape exchange data and provide a tax calculator to help figure out your tax liability. Ensure that the tax software you use is designed for UK taxation.
Hire an Accountant
Many UK-based accountants provide crypto-related tax advice, which is especially useful if you deal in large sums. Working with them can also help in finding legal ways to reduce your tax liability.
Final Thoughts
Cryptocurrency is a relatively new asset, and governments are still figuring out its complex traits. Authorities are modifying rules periodically to ensure efficient taxation is balanced with due encouragement to investment. Thus, it’s critical to stay abreast of all rules and regulations formed under HMRC and the UK government.
