Cryptocurrency tax regulations in the United Kingdom are an essential consideration for any individual or business involved in cryptocurrency trading. Her Majesty’s Revenue and Customs (HMRC), the UK’s tax authority, has provided guidance on how cryptocurrencies, or as they term them, “cryptoassets,” are taxed.
How are cryptocurrencies defined in the UK?
To begin, it’s crucial to understand how HMRC classifies cryptocurrencies. They recognise three types of cryptoassets: exchange tokens (like Bitcoin), utility tokens, and security tokens. The tax treatment depends on the nature and use of the token. For our purposes, we will mainly focus on exchange tokens, which are most commonly used for trading.
HMRC does not consider cryptocurrencies as currency or money. Instead, they are viewed as a form of property. As a result, the buying, selling, and even trading of cryptoassets can have tax implications. Specifically, two types of taxes are most relevant to crypto trading in the UK: Capital Gains Tax (CGT) and Income Tax.
CGT is the primary tax applied to profits made from buying and selling cryptocurrencies. When a person disposes of a cryptoasset – either by selling it, exchanging it for another cryptocurrency, using it as payment, or gifting it – they may be required to pay CGT on any gains they have made.
The taxable gain is the difference between the purchase price (plus associated costs) and the sale price (minus any transaction costs). However, each individual has an annual tax-free allowance for capital gains, known as the Annual Exempt Amount. For the 2022/23 tax year, this was £12,300. If the total taxable gains in the tax year are below this amount, there is no CGT to pay.
If the total gain exceeds the Annual Exempt Amount, CGT is due. The rate of tax depends on the individual’s income and the asset type. As of my knowledge cutoff in September 2021, the tax rate for individuals is 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. For businesses, the Corporation Tax rate applies.
Calculating gains and losses from crypto trading
The calculation of gains or losses can be complex due to the volatility of cryptocurrencies and the fact that they are often traded in pairs. When calculating the gain or loss for CGT purposes, the Sterling value of the cryptocurrency at the time of acquisition and disposal must be used.
In some cases, trading cryptoassets may be considered a trade, much like trading in shares or property. If the level of activity, nature of the sales, and decision-making process indicate a financial trade, the profits may be subject to Income Tax instead of CGT. This might be the case for individuals who are regularly day trading or swing trading cryptoassets.
Income Tax would also apply to individuals who receive cryptoassets as a form of payment or through mining, transaction confirmation, or airdrops. The amount of Income Tax due depends on the individual’s Income Tax band, with rates ranging from 20% to 45%.
HMRC also has rules on ‘Pooling’ for cryptoassets. Instead of tracking the gain or loss for each transaction, cryptoassets of the same type and acquired in the same way can be ‘pooled’ together. Each pool calculates its own ‘allowable cost’ – the total cost of the pooled tokens plus any allowable costs. When a token is disposed of from the pool, a proportion of the pooled allowable cost is deducted to work out the gain.
In terms of record-keeping, HMRC requires individuals and businesses to keep records of each cryptoasset transaction for at least 5 years after the tax year they relate to. This should include the type of cryptoasset, date of the transaction, if they were bought or sold, number of units, value of the transaction in pound sterling, and the cumulative total of units held.
In summary, the tax implications of crypto trading in the UK can be complex and depend on a variety of factors. HMRC’s guidelines offer a starting point, but given the complexity, seeking advice from a tax advisor or professional well-versed in cryptoassets can be extremely beneficial. It is also essential to stay updated with any changes to tax legislation and HMRC guidelines regarding cryptoassets, as these may change over time.