Do you pay tax on crypto gains in the UK? This is a question that is asked a lot. Cryptocurrencies are becoming more and more popular, and with their increasing value, comes the need to pay taxes on any profits made. While many crypto traders may not realise it, it is a legal requirement in the UK to declare crypto gains and pay taxes on profits over £12,300.
But how do you go about paying these taxes? And are there any ways to reduce your tax burden?
In this article, we will answer these questions and more to make sure you are up to scratch with all the relevant crypto tax regulations.
What Kind of Tax Needs to be Paid on Crypto Gains?
In the UK, any profits you make from trading cryptocurrencies are subject to Capital Gains Tax (CGT). This is a tax on the profit you make when you sell or dispose of assets such as property, shares or, in this case, cryptocurrencies.
You become liable for CGT once your total taxable gains for the year exceed the £12,300 annual exemption limit. If this is your only source of income, you will pay tax at the basic rate of 10% on any profits above the threshold. Higher-rate taxpayers will pay 20% and then incrementally higher rates depending on the current UK tax brackets.
What is Cryptocurrency Disposal?
HMRC defines cryptocurrency disposal as “any activity that results in the transfer of cryptocurrency to another person or organisation”. This could include selling, gifting, transferring or exchanging your crypto.
It is important to note that you are liable for CGT on the profit you make from each individual disposal, not on the total amount of crypto you hold. So, if you bought one bitcoin for £12,000 and it is now worth £24,000, you would only pay CGT on the £12,000 profit if you sold the entire coin.
If you only sold half of the coin, you would pay CGT 50% of the profits. This is why many crypto traders choose to “sell” their cryptocurrency by exchanging it for another type of crypto, rather than cash. By doing this, they can defer or even avoid paying CGT on their profits.
However, it is important to note that HMRC does have the power to treat crypto-to-crypto exchanges as disposals, so it is always best to declare your profits and pay any tax due if you are worried about potential penalties.
What Can You Deduct from Taxable Gains?
There are a few allowable costs that you can deduct from your taxable gains to reduce the amount of tax you owe. These include:
Transaction fees – The fees you pay to buy or sell crypto on an exchange.
Advertising costs – If you promote your crypto business with online ads, these costs can be deducted from your taxable gains.
Contract fees – Any professional fees you incur in relation to your crypto trading activities, such as legal or accounting fees.
Valuation costs – If you need to have your crypto assets valued for tax purposes, these costs can be deducted.
How Does “Pooling” Work with Crypto Gains?
HMRC uses a system of “pooling” to calculate CGT on crypto assets. This means that all of your cryptocurrency disposals in a tax year are added together and treated as one asset for CGT purposes.
The pooling system is designed to simplify the tax treatment of crypto assets, but it can also result in a higher tax bill if you have made a lot of small disposals over the course of the year.
How to Work Out What You Owe
To calculate your CGT liability, you first need to work out your total gains for the year. This is done by adding up the pound sterling value of all your cryptocurrency disposals and subtracting the cost of those assets (what you paid for them plus any allowable costs).
You then need to apply the relevant CGT rate to your total gains to calculate your tax bill. As noted above, the CGT rate will depend on your marginal tax rate.
If you are a higher or additional rate taxpayer, you will also need to calculate your “annual exempt amount”. This is the amount of money you can earn in a year before you start paying tax at those rates.
How Do You Pay Taxes on Crypto Gains?
If you are liable for CGT, you will need to pay it to HMRC. This can be done via their Self-Assessment tax return system.
You will need to declare your crypto gains on your tax return and pay any tax due by the 31st of January following the end of the tax year in which you made the disposal. So, if you sold crypto in the 2021/2022 tax year, you would need to declare your gains and pay any tax due by 31st January 2023.
It is very important that you file accurate returns before the due date or you may be subject to penalties.
What if you Live Outside the UK?
If you are a British citizen outside the UK, you are still liable for CGT on your crypto gains. However, you may be able to claim the “temporary non-residence” relief if you have been living outside the UK for less than five years. This relief allows you to exempt any gains made before you became a non-resident from CGT. The process involves applying to HMRC for a “time apportionment” calculation to be made on your behalf.
Other Potential Taxes for Businesses
If you are running a business that profits from cryptocurrency, you may also be liable for other taxes, such as:
Corporation tax – This is the main tax businesses in the UK have to pay. If your business is based in the UK and makes a profit, you will need to pay corporation tax on that profit.
Corporation tax on chargeable gains (CTCG) – If your business makes a profit from selling crypto assets, you may also be liable for CTCG. This is a special rate of corporation tax that applies to gains made on the disposal of assets including crypto.
Income tax – Likewise, if your business is based in the UK and makes a profit from crypto, you will need to pay income tax on that profit.
National Insurance – British companies will also need to pay National Insurance contributions (NICs) on any crypto-related profits. This is a tax that goes towards the funding of state benefits, such as the NHS and state pensions.
Stamp taxes – These are special taxes that apply to certain financial transactions, including the buying and selling of crypto assets.
VAT – You may also need to charge VAT on any goods or services you sell that are related to crypto. VAT is a consumption tax that is charged on most goods and services in the UK.
Whether your business will need to pay some or all of these will depend on the specific details of your business. For example, if you are a sole trader, you will only need to pay additional income tax and NICs on your crypto profits. However, if you are a limited liability company, you will need to pay all of the taxes listed above.
Tips for Paying Taxes on Crypto
If you are liable for CGT, there are a few things you can do to minimise your tax bill:
Use “pooling” to calculate your gains – As explained above, this means grouping together all of your crypto assets of the same type and treating them as one asset. This will help to minimise your CGT bill by ensuring that you only pay tax on your overall gain, rather than on each individual transaction.
Use allowable costs to reduce your taxable gains – You can also deduct certain costs from your taxable gains. As noted above these include transaction fees, advertising costs, contract fees, and valuation costs. These are considered tax-deductible by HMRC because they are considered to be necessary costs incurred in the course of disposing of your crypto assets.
Use “gifts” to transfer assets to family members – You can also gift crypto assets to family members, such as spouses or children. This is a good way to transfer wealth without incurring CGT. However, you should be aware that there are limits on how much you can gift without incurring inheritance tax.
Keep accurate records – It is important to keep accurate records of all your crypto transactions. This will help you to calculate your gains correctly and ensure that you pay the right amount of tax.
Pay your taxes on time – Finally, it is important to pay any taxes that you owe in a timely manner. HMRC has the power to impose penalties for late payment, so it is important to make sure that you pay any taxes that you owe on time.
10 Tips for Successful Crypto Trading
If you want to be a successful crypto trader, there are a few things you should keep in mind:
Diversify your portfolio – As with any time of investment, it is important not to put all your eggs in one basket. Invest in a variety of different cryptocurrencies to spread your risk.
HODL – “Hold on for dear life” is a popular saying among crypto investors. This means holding onto your cryptocurrencies for the long term, rather than selling them as soon as they increase in value. If you look at the rise in the value of Bitcoin since its conception, you can see how profitable this strategy can be.
Create a system for tracking your profits and losses – This will help you to keep track of your progress and ensure that you are making money overall. There are many apps and software options available that can help you to do this.
Set realistic goals – Don’t expect to become a millionaire overnight. We have all heard the stories of people amassing vast fortunes by investing in Bitcoin, but these are the exception rather than the rule. Set realistic goals and be prepared to put in the hard work to achieve them.
Stick to your plan – Once you have a trading plan, stick to it. Don’t let emotions get in the way of making rational decisions. Cryptocurrency prices can be volatile, so it is important to be patient and wait for the right time to buy or sell.
Don’t invest more than you can afford to lose – This is important advice for any kind of investment, but it is especially important in the volatile world of cryptocurrency. If you are new to crypto trading, start small until you have gained experience and knowledge.
Be prepared for the worst – The cryptocurrency market is full of risks, so it is important to be prepared for the worst. Have a plan in place for what you will do if your investments lose value.
Do your own research – Don’t blindly follow the advice of others. Everyone claims to be an expert in crypto these days but it is important to do your own research and make your own decisions.
Keep up with the news – The crypto world is constantly changing, so it is important to keep up with the latest news and Research cryptocurrencies thoroughly before investing in them.
Educate yourself – Finally, it is important to educate yourself about cryptocurrency and blockchain technology. The more you know, the better equipped you will be to make successful investment decisions long into the future.
These are just a few things to keep in mind if you want to be a successful crypto trader. By following these tips, you can give yourself the best chance of success.
As you can see, the answer to whether you pay tax on crypto gains depends on the amount you profit and if you are trading in a personal capacity or through a business. The UK has some of the most comprehensive laws when it comes to cryptocurrency, so it’s important to be aware of your tax obligations before you start trading. Following the tips above will help you to minimise your tax bill and ensure that you are compliant with the law.