Do I have to pay tax on cryptocurrency in the UK?
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This guide is designed to explain cryptocurrency tax laws in the United Kingdom. It goes through the most important things you need to know in order to pay the right amount of tax, like the information you need to keep at hand and when the deadlines are.
Before we start, you should note that tax rules can change and you should consult an accountant or tax advisor if you aren’t sure what you owe.
Is cryptocurrency taxed in the United Kingdom?
Yes. The authorities in the UK were one of the first to introduce a tax on cryptocurrency. There are two different ways that it can be taxed, depending on how you got hold of your coins. If you were paid them as part of your salary then you will have to pay income tax, while if you bought them as an investment then they are liable to a capital gains tax.
Any income tax burden should be dealt with by your employer (although it’s a good idea to check). Otherwise, cryptocurrency is treated just like stocks and so you need to report what you sell each year to HMRC, the UK tax authority, as you might be liable to pay tax on the profits.
The exact rules for what you have to pay and how much can vary and it’s a good idea to visit the UK government website to check whether you owe anything. Their tax guide to cryptoassets explains the law in detail.
How is cryptocurrency taxed?
Through capital gains tax that you pay on the profits you make. There is no tax on buying cryptocurrency but you may be charged after you sell it. Your ‘capital gains’ are the money you received from selling the coins minus what you paid for them, and you only have to start paying tax once the total value of those gains exceeds £12,300.
That figure represents your personal allowance. Everyone is entitled to tax-free capital gains up to that amount every year and for many people that means you won’t have to pay tax at all. Once you go over that amount, then you pay tax on the excess and the exact percentage depends on which income tax band you’re in.
How do I work out my capital gain?
By comparing the price at which you sold your coins to what you bought them for. The difference is the capital gain. Calculating the exact value of your capital gain depends on how you bought the coins in the first place.
If you simply bought your coins in one transaction, say you paid £20,000 for 1 Bitcoin, then it is easy to work out the difference. You simply subtract that from how much you sold it for, which might be £15,000, and you have a capital gain of £5,000.
However, if you accumulated your coins over a few transactions then the buy price is the average of what you paid. So if you bought 1 BTC for £20,000 and then another for £30,000, your purchase price for tax purposes would be £25.000. If you then sell 1 BTC for £27,500, your capital gain is £2,500.
You should also note that if you exchange one cryptocurrency for another, that counts as a sale when you’re working out tax. If you buy 1 BTC for £20,000 and then use that Bitcoin to buy 10 ETH, then the sale price of your Bitcoin is the market value of Ethereum. For example, if each ETH was worth £2,100 at the time, then your Bitcoin sale price would be £21,000, for a capital gain of £1,000.
How much tax do I have to pay?
The amount varies depending on which tax band you fall into. Once your capital gains exceed the allowance, the profits are taxed at 10% if you are a basic rate taxpayer or 20% if you are a higher rate one.
If you aren’t sure which band you’re in, it’s easy to find out by going to the government website. At the moment, anyone whose total annual income is £50,270 or below falls into the basic tax band, while anyone above that is charged at the higher rate. However, these amounts can change quite regularly and it’s a good idea to check the latest guidelines.
Remember that you only have to pay tax on the profits from any capital gains that exceed £12,300 per year. That means if you made a profit of £13,000 on cryptocurrency over the course of a single year, £700 of that would be taxable. You would have to pay £70 tax if you are a basic rate taxpayer or £140 otherwise.
How to avoid tax on cryptocurrency
You should never avoid paying tax that you owe, and be careful to make sure you report all your capital gains to the tax authorities. However, there are ways to minimise the amount of tax you have to pay.
- Use your personal allowance. The important thing to remember about the personal allowance is that you get a new one every year and it doesn’t carry over. Use that information to time your sales, for example you might want to sell some cryptocurrency just before the end of the tax year (in April) in order to use up the remainder of your allowance.
- Report your losses as well as your gains. When calculating tax, any losses you make are deducted from your gains, so you should include details of any cryptocurrency you sold at a loss as well. You only start paying capital gains tax once your net gains exceed the allowance, and if you made an overall loss one year you can carry it forward to deduct from gains in the next.
- Buy through an ISA. An ISA is a tax-free savings account that you can use to buy shares. It gives you a total allowance of £20,000 per year for any investments you hold inside it that is exempt from capital gains tax. It’s not possible to buy cryptocurrency outright through an ISA, but you could use one to buy ETFs that track the price of certain coins
How do I pay?
The best way is to fill out a self-assessment tax return and then HMRC will send you a letter telling you what you owe and how to pay. You need to fill out the form by the end of January following the tax year, so for any gains made between April 2020 and April 2021, you need to submit a tax return by the end of January 2022.
On the form you simply need to include details of all the cryptocurrency you sold over the course of the year, such as the price you paid for it to start with as well as what you received, and any costs of doing so, like trading fees. HMRC will use that information, along with all your other income and information, to calculate your tax burden
If you earned your cryptocurrency as part of your salary or your employment, then your employer should deal with all the relevant details. However, it’s a good idea to check with them or fill out your own self-assessment return just in case.
What happens if I don’t report my cryptocurrency profits?
You will be forced to pay the money you owe anyway and if the authorities believe there was a deliberate attempt to avoid tax then it can result in a substantial fine on top. Not reporting details of your profits (assuming they exceed the capital gains allowance) can lead to unexpectedly large tax bills in the future.
You should keep details of all your cryptocurrency transactions so that it’s easy to fill out a tax return every year. Remember that you also need to keep track of any shares or other investments you’ve sold over the course of the year as well.
A quick recap of what we’ve learned
The most important thing you need to remember is that cryptocurrency is taxable and you have to pay tax on any profits you make over an annual allowance of £12,300. You calculate your capital gains on each coin based on the sale price minus the buy price (or an average of the price you paid if you bought your coins in batches).
The gov.uk website is the best place to check the exact tax laws that govern cryptocurrency because they are liable to change at any time. These laws also vary across countries, so if you’re based somewhere else then you should take time to research how it is taxed where you live.
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