The UK is one of the earliest adopters of cryptocurrencies and blockchain technology. According to reports, as of 2018, the UK already had about 1.5 million crypto users. This number grew to 9.8 million by February 2021.
What Cryptocurrency Taxation Means to the UK
While cryptocurrency is popular in the monarch region, virtual currency adoption still struggles in the UK due to the shifting tides in opinions from regulators and watchdogs such as FCA. The watchdogs have banned projects, including some exchanges and crypto ATMs.
However, despite the country’s struggles in setting up a proper regulatory framework for digital assets, the United Kingdom seems to have a well-structured program for taxing cryptocurrencies. For that matter, every crypto investor in the UK must exercise their civic duty of filing for crypto taxes. You don’t know how? Don’t be alarmed; this guide is for you! We will look at the crypto taxable events, and the amount of tax UK residents should pay.
When Should You Pay Taxes on Crypto in the UK?
As a UK citizen, you must understand the events that could trigger tax payments on Bitcoin, Ethereum and other cryptocurrencies. They include;
Buying and Selling Crypto
You must pay capital gain taxes when you sell your crypto at profits. Any trading losses can reduce the capital gain tax bill.
Crypto swapping is also a capital gain taxable event, and you will pay tax for any profits. In some circumstances, when you trade massive amounts of crypto, you might have to pay income tax and not a capital gain tax.
Mining and Validating
Running a small mining operation may be a hobby, and you will pay income tax. However, this will depend on factors such as;
- Degree of activity
However, if you are running a mining business, any profits are treated the same as trading profits; hence you will pay income tax. When you sell the mined crypto, any gains are trading profits; thus, the transaction is subject to NICs.
Since there are many different Defi protocols, taxation can be pretty complex. When it comes to staking or lending, the HMRC could decide to treat it as capital gain disposal. Payment from a DeFi protocol to you is an income.
Paid in Crypto
If you are paid in any crypto, you must pay income tax. Moreover, you will have to settle the national insurance contributions if you receive crypto payments.
Cryptocurrencies are treated by HMRC as property under the tax laws in the UK.
Suppose you have done some tasks and earned airdropped tokens; it’s an income subject to income tax. However, airdrops will not be treated as income if you receive them without doing any tasks. When you sell the airdropped tokens, it is a capital gains taxable event.
How Much Tax to Pay
As already seen, some events may demand capital gains taxation or income tax settlement. Traders’ net profits are subjected to 0%, 20%, 40%, or 45% income tax, depending on your tax bracket. The tax structure above works in England, Wales, and Nothern Island. There are two other tax bands for the Scottish, including 19% as the starter rate or 21% as the intermediate rate.
Moreover, you will have to send contributions to the National insurance, with the tax rates ranging between 2% and 12%.
In Capital gains taxation, there is a tax-free allowance or the first £12,300. However, any amount past that will be taxed at 10% for those in the basic rate tax band. Those using higher tax rate bands will pay 20% on gains.
Preparing for the UK Crypto Tax Season
To ensure you adhere strictly to tax regulations, you must make the necessary preparations early. So, how can you do that? Here are a few things to consider;
- Keep proper records of your wallets and even the staked or lent crypto.
- Have ready money to pay taxes in the GBP.
- Set tax date reminders, and start preparing early.
- Hire professionals like an accountant to make sure everything is done correctly.
- You can also choose to work with crypto tax software. It’s a tool designed to help calculate and trace your tax obligation by collecting data from Defi protocols, exchanges, and wallets. Among the popular crypto tax software in the UK include Cointracker, TokenTax, and Koinly.
- Finally, you must submit the self-assessed tax return to the HMRC by filling it out online. In the annual self-assessment tax return, the HMRC requires you to declare: gains, token type, disposal date, number of disposed of tokens, remaining tokens, wallet addresses, values in the sterling pound, and costs before and after disposing of the tokens.
Crypto Tax Avoidance in The UK
Yes, you can avoid paying taxes on crypto in the UK under some circumstances. Among the events include;
- Airdrops. In a token airdrop, if you received the token for simply doing nothing, you dont need to pay tax.
- Buy crypto coins using fiat
- Hodling for as long as possible
- Transferring crypto across your wallets
- Crypto gifts to your spouse
What if Your Crypto Is Stolen or Lost?
Many want to know the answer to this question to see if they can count lost or stolen crypto as losses. Fraudulent actors often scam many people and, in the process, lose large sums of crypto.
However, when scammed, you can still recover the crypto. Therefore, the HMRC does not treat scammed crypto as disposal; hence you will not claim losses to reduce your capital gains. So, what if you pay for crypto, which becomes worthless? In such a case, the HMRC allows you to make a negligible value claim, reducing capital gains.
In other cases, you could lose crypto by losing your private keys. Since it’s possible to recover the private keys, you still own the assets and cannot claim losses to reduce capital gains. However, if it’s impossible to recover the private keys, you are allowed to make a negligible value claim, which, if accepted, will reduce your capital gains.
In any financial system, a citizen, whether in Europe or the depths of the Sahara, paying taxes is a responsibility and obligation. If you fail to or blatantly ignore that responsibility, the government is legally allowed to charge you for tax evasion. In the UK, you could face jail time or hefty fines for the offence.
As described above, this guide gives insight into the UK’s taxation framework and highlights the important events worth noting when filing for taxes. Events like Buying and selling crypto, mining, airdrops, or crypto payments can all trigger tax obligations. The amount of tax to pay depends primarily on your income tax bracket, with the bands ranging between 0% and 45%. Understanding the UK crypto taxation structure could help you avoid paying deep-pocket fines.