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Crypto Tax in the UK – What’s to Understand?

So how exactly is cryptocurrency taxed? Recently we wrote on cryptocurrency tax to highlight the fact that HMRC are writing nudge letters to people to declare gains and in this blog we explained the currency and the global cryptocurrency stage and UK position in terms of regulation.

In most countries crypto is classed as property and an asset for tax purposes where Capital Gains and Income Tax apply.  It might best to think of crypto as an asset rather than a currency, in fact a property asset for tax purposes. An asset being any resource you own with economic value expected to provide a future return. Like shares, investment property and collectables, crypto currency is within this group.

This blog looks at how crypto is taxed as capital and as income and the various calculations you can safely make in the UK.

Capital Gains Tax and Crypto Currency

Shares and property disposals attract capital gains tax and so does crypto. When calculating tax owed on crypto gains, you need to know the cost base of the crypto asset, price at acquisition and disposal. Then you convert all figures into your currency – UK sterling for most people reading this.

A crypto capital gain (or capital loss) can be triggered by disposals such as selling crypto into fiat currencies, swapping crypto for other crypto e.g. Bitcoin to Ether, using crypto to purchase services or goods and gifting crypto (depending on your country). Capital gains tax-free thresholds apply in the UK.

Crypto as Income

So how is crypto taxed as income? When earned as income, crypto payments are the equivalent of a salary, ‘staking rewards’ are like dividends, ‘mining tokens’ are like income, ‘airdrops’ are like bonuses, ‘DeFi interest’ is like bank account interest and a ‘referral bonus’ is like commission.

Like other asset purchases, crypto purchasing is tax free, minus any applicable goods and services tax or VAT. Typically crypto investors don’t pay tax on purchases, a recipient of a gifted amount of crypto pays no tax either. It’s the disposal of that asset that attracts tax.

Other Tax Calculations

Cost basis, the amount you spend to acquire an asset including purchase price, transaction fee, brokerage commissions and other relevant costs is used to calculate tax from. The crypto cost basis takes the purchase price plus the fees and divides by quantity. There are various methods as follows, the FIFO method being the one used in the UK.

  • ACB- Average cost basis method: The average cost basis is the simplest of all methods to calculate your tax – it’s the total amount paid to purchase the crypto divided by the number of cryptocurrency held. Widely used in Canada/Sweden but not allowed in the US
  • FIFO – First in First Out: FIFO crypto is calculated on the assumption that the first crypto sold is the first one bought. This method is widely used and benefits long-term holdings and a bull market. Preferred in the UK, USA and Australia.
  • Last in First Out: This cost basis for a sale takes the cost of the most expensive crypto you acquired. This means the crypto assets with the highest cost basis are the ones sold first. As capital gains are equal to total proceeds minus the cost basis, a larger cost basis means your client capital gains are minimised.

Crypto Tax in the UK

HMRC views cryptocurrency as property and is taxed as Capital Gains Tax or Income Tax.  No tax is due when you buy, hold or move it between wallets. Gifts to spouse are non-taxed and allow you to double your tax free allowance in a year and donations are also tax free. The amount of capital gains owed depends on how long you have held assets for and your income tax rate.

  • Tax breaks: taxed above tax-free allowance of £12.3k (The Annual Exempt Amount for Capital Gains Tax). For income tax you’re taxed above your Personal Allowance of £12,570.
  • Short-term capital gains: Your rate of capital gains tax is determined by income tax band. Basic rate for those earning under £50,270 pa (10%), higher rate above this pay 20%.
  • Long-term capital gains. Long-term capital gains are taxed at the same rate as short-term.
  • Losses: You can carry forward registered losses indefinitely but you have to register losses within 4 years. (HMRC requires ‘share pool accounting’ when calculating cost basis of a coin disposal to avoid investors selling assets at a loss and repurchasing them after to reduce tax liability (‘Same Day Rules’, ‘Bed and Breakfasting Rule’ and ‘Section 104 Pool’).

All taxable assets are included in the same Self-Assessment Tax Return form in the UK.

HMRC Crypto Tracking

HMRC can track cryptocurrency. It has a data sharing programme with all UK exchanges with data going back as far as 2014. HMRC is using this information to send nudge letters to crypto investors, reminding them to report their crypto and pay taxes.

HMRC will come looking if suddenly a large deposit of fiat is made into your bank account or a large amount of cryptocurrency into an exchange wallet you own. Coinbase are also contacting customers with £3,000+ in crypto assets to let them know that they’re sharing account information with HMRC.

A more in-depth guide: Crypto Tax UK: Ultimate Guide 2022 | Koinly

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For help calculating your unique position please don’t hesitate to contact our team of tax specialists for advice and support on Let’s Talk.

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