Cryptocurrencies are no doubt gaining mainstream attention even in countries with tight tax regulations, including in the United Kingdom (UK). In the UK, businesses and e-commerce platforms have started accepting cryptocurrencies as a form of payment due to the advantages of lower transaction fees and fast transaction time. However, the ease of transaction using cryptocurrencies comes with a tax liability.
The UK government through the HM Revenue & Customs (HMRC), the agency responsible for administering and enforcing the tax regime in the country, expects those involved in cryptocurrencies to pay taxes depending their circumstances and nature of transactions they are involved in. Which means that yes, if you live in the UK, you do need to declare crypto investments to HMRC.
Common taxes in the UK include Income Tax, Capital Gains Tax (CGT), as well as Value Added Tax (VAT).
In this guide, we will walk you through crypto taxation in the UK and also explain the different types of crypto transactions that may attract taxes in the UK.
Types of Crypto Transactions
The most prevalent form of crypto transaction is when individuals buy a cryptocurrency using either fiat currency or another cryptocurrency and subsequently sell it for a profit or exchange it for goods and services. In other words, buying cryptocurrencies is the process of using a fiat currency like the GBP to purchase cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Solana (SOL) on an exchange. In the UK, buying cryptocurrencies is not a taxable event.
Selling the cryptocurrencies that you purchased to a third party on an exchange is a taxable event and is subject to the Capital Gains Tax (CGT).
Crypto mining is the art of solving complex mathematical puzzles to verify transactions on the blockchain. Generally, miners are rewarded with cryptos for every successful verification. In the UK, income earned from crypto mining is a taxable event and is subject to Income Tax. If you later sell the earned cryptocurrencies, you’re also expected to pay a capital gain tax to the tax authorities.
Complying with anti-money laundering (AML) and know-your-customer (KYC) regulations is mandatory for cryptocurrency mining activities in the UK.
Airdrops are cryptocurrencies received at the early stage of a crypto project as part of the project’s marketing campaign to launch a token. Income earned from airdrops is subject to Income Tax. If you decide to sell the airdropped cryptocurrencies, the HMRC will come knocking for capital gain taxes.
In the UK, airdrops must adhere to regulatory requirements, which include complying with anti-money laundering (AML) and know-your-customer (KYC) regulations. It is crucial to verify the compliance of the cryptocurrency project organizing the airdrop with these regulations in order to prevent any potential legal complications.
Crypto staking is the process of locking up your crypto assets in a vault for a specific period of time to earn passive income. Income earned from staking your assets to support a network is subject to Income tax. In the UK, staking cryptocurrency must adhere to regulatory requirements, including compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations.
Non-fungible Tokens (NFTs)
In the UK, trading (buying or selling) NFTs is subject to capital gains tax. You will pay Income Tax If you earn NFTs either from a business deal or from airdrops. In other words, NFTs are liable to be taxed. When an NFT is sold, it is regarded as a capital gain and thus falls under the jurisdiction of capital gains tax (CGT).
Capital Gains Tax Rates
According to the HMRC, the Capital Gains Tax rates are 10% and 20% for basic-rate and higher-rate taxpayers respectively. However, as of the 2021/2022 financial year, the Annual Exempt Amount (AEA) was pegged at £12,300, which means if your gains are lower than the AEA, you won’t pay capital gains tax. To avoid falling short of the tax laws, ensure you use the best crypto tax software to file your tax returns.
Individuals classified as additional rate taxpayers, earning more than £150,000 during the tax year 2021/22, are subject to a 20% capital gains tax (CGT) rate on their cryptocurrency profits.
What Is The Filing Deadline?
The deadline for submitting a paper tax return in the UK is set at October 31st, according to the HMRC. Then the deadline to file taxes online is January 31st.
Does Marital Status Affect Crypto Taxes?
No. Your marital status doesn’t affect your tax payment. But if you transfer a part or all of your cryptos to your partner, while you won’t pay taxes, your partner (the receiver) will assume the tax liabilities. Every partner would be liable for capital gains tax on their portion of the profit, depending on their own tax-free allowance and tax rates. These tax-free allowances and rates are determined by the individual circumstances of each partner, including their income level and tax bracket.
With cryptocurrencies quickly becoming mainstream, the knowledge of crypto taxation cannot be overemphasized. In the UK, crypto taxes are consistent as proposed by the HMRC regardless of your region. If you trade cryptocurrencies on more than one exchange, make sure you keep accurate records of your transactions so as to comply with tax regulations.