How is cryptocurrency taxed in the UK?
In the United Kingdom, cryptocurrency is subject to capital gains and income tax.
Capital gains tax events in the UK
When you dispose of cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it. HMRC explains that disposals include:
- Selling cryptocurrency for fiat
- Trading cryptocurrency for other cryptocurrencies
- Using cryptocurrencies to purchase goods and services
Income tax
Typically, you’ll recognize income when you earn cryptocurrencies. The following transactions are subject to income tax.
- Receiving cryptocurrency as compensation for labour
- Mining cryptocurrency as a hobby
- Staking cryptocurrency
How much is cryptocurrency taxed in the UK?
During the 2023-2024 tax year, UK taxpayers had a Capital Gains tax-free allowance of £6,000. This will fall to £3,000 during the 2024-2025 tax year.
For example, let’s say you earned £50,000 of income and had £13,000 of cryptocurrency capital gain in the 2023-2024 tax year. In this case, you’d subtract the capital gains allowance and pay 10% tax on £7,000 of capital gain.
Do crypto exchanges report to HMRC?
Because of cryptocurrency’s pseudo-anonymous nature, many investors believe that it’s impossible for the HMRC to track cryptocurrency transactions.
However, it’s important to remember that HMRC has a data sharing program in place with major exchanges—meaning that tax authorities can access KYC (Know Your Customer) information and crypto transaction data.
In January 2022, Coinbase sent an email to clients who had £3,000 or more in their account that their account information would be shared with HMRC.
It’s likely that other exchanges operating in the United Kingdom share customer information with tax authorities upon request.
Can the HMRC track my cryptocurrency?
In recent years, the HMRC has taken steps to curb crypto tax evasion. The HMRC has requested and obtained customer data from major exchanges and sent ‘nudge’ letters to crypto investors to encourage them to pay capital gains and income tax.
What happens if I don’t report my crypto gains and losses in the UK?
Under HMRC rules, taxpayers who do not disclose gains could face a 20% capital gains tax plus any interest and penalties of up to 200% of any taxes due. Those found to have evaded the tax could also face criminal charges and jail time.
There’s no guarantee of what will or will not happen if you fail to file your cryptocurrency taxes with HMRC. However, it’s recommended to stay compliant by properly filing all of your capital gains and income.
If you haven’t been reporting your gains or losses in previous years, you can get everything in order by filing an amended self-assessment tax return.
Tax-free cryptocurrency transactions
Wondering what cryptocurrency transactions are not subject to tax in the UK? Let’s walk through a few common transactions that won’t raise your tax bill.
- Holding cryptocurrency
- Wallet-to-wallet transfers (i.e. sending crypto from one wallet you own to another wallet you own)
- Giving cryptocurrency to a partner or spouse
How to legally reduce your crypto taxes?
While there’s no way to legally avoid your crypto taxes, there are strategies that you can use to reduce them.
1. Optimise for tax-free thresholds
Remember, your first £6,000 of capital gain is tax-free. It can be valuable to keep this number in mind when taking profits on cryptocurrency.
2. Dispose of your cryptocurrency in a low-income year
Your tax rate is determined by how much income you receive in a given year. As a result, disposing of your crypto in a low-income year can lead to a significantly reduced tax rate.
3. Donate your cryptocurrency
If you donate your crypto to a registered charity without receiving anything in return, you can deduct the full fair market value of your crypto. However, if the price of your cryptocurrency has increased since you originally received it, you will incur a capital gain upon your donation.
What is the deadline for reporting my crypto taxes in the UK?
In the UK, the tax year starts on April 6th and ends on April 5th of the following year.
The deadline for submitting your tax return is different for paper and online submissions. For the 2022-2023 tax year, the paper deadline is October 31st, 2023 and the online deadline is January 31st, 2024.
How are different transaction types taxed?
Let's take a look at how specific crypto transactions are treated from a tax perspective in the UK.
TAX FREE
How is holding cryptocurrency taxed?
There is no tax for simply holding cryptocurrency in the United Kingdom. You won’t be required to report your crypto to the HMRC unless you earn or dispose of your holdings.
TAX FREE
How is buying cryptocurrency taxed?
Buying cryptocurrency with fiat currency like the British Pound is considered a non-taxable event.
However, you should keep a record of how much it cost to acquire your cryptocurrency so that you can calculate your capital gains and losses in the case of a future disposal.
CAPITAL GAINS TAX
How is selling cryptocurrency taxed?
When you sell cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto changed since you originally received it.
Example
Henry buys £1,000 of BTC.
Later, Henry sells his BTC for £1,200.
Henry incurs £200 of capital gain.
CAPITAL GAINS TAX
How are crypto-to-crypto trades taxed?
Trading one cryptocurrency for another is considered a taxable event. You’ll incur a capital gain or loss depending on how the price of the crypto you’re trading away has changed since you originally received it.
Example
Daniel buys £3,000 of ETH.
The price of Daniel’s ETH rises to £3,300.
Daniel swaps his ETH for BTC and incurs £300 of capital gain.
TAX DEDUCTIBLE
How are cryptocurrency losses taxed?
If the price of your cryptocurrency at disposal is lower than your original cost basis, you can claim a capital loss. Capital losses can offset your capital gains in the current year and reduce your tax bill!
If you have a net loss for the year, your losses can be carried forward to offset capital gains in future tax years.
Once you’ve registered your cryptocurrency losses, you can carry them forward indefinitely. However, you have a four year time limit to register your capital losses. After this period, you can no longer register your losses and use them to offset gains.
You should register your capital losses on your Self-Assessment Tax Return.
Example
Emma has £2,000 of capital gains for the year.
Emma sells her BTC for a £2,000 loss.
Emma’s capital losses offset her capital gains for the year.
TAX DEDUCTIBLE
How is the cryptocurrency I’ve earned from my job taxed?
If you earned crypto income in compensation for your work, you will be taxed based on your cryptocurrency’s fair market value at the time it was received.
Example
Diane earns £3,000 of ETH from her job.
Later, she sells her ETH for £3,300.
Diane recognizes £3,000 of income and £300 of capital gain.
INCOME TAX
How is cryptocurrency mining taxed?
Cryptocurrency received from mining is considered a form of income. The income you recognize is equal to the fair market value of the crypto at the time you gain possession of the coin.
The amount of income recognized then becomes the cost basis in the coin moving forward.
Of course, it’s also important to remember that your cryptocurrency income from mining is classified differently whether you are mining as a hobby or as a business.
Mining as a Hobby
If you are mining as a Hobby, your income has to be declared separately under the heading of "Miscellaneous Income" on your tax return. Appropriate expenses can be deducted from taxable income.
When you dispose of your mining rewards, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
Remember, HRMC has stated that there is no need to complete a Self Assessment tax return for your mining activity if you’ve received less than £1,000 in crypto-assets.
Mining as a Business
If you are mining cryptocurrency as a business, your mining income will be added to trading profits and be subject to income tax. Any profits made from disposals will also be considered income. Appropriate expenses are also deductible.
You can learn if your activity should be classified as a business or as a hobby with HMRC’s guide here.
Capital Gains Tax
Income Tax
How is cryptocurrency staking taxed?
Cryptocurrency staking rewards are taxed as income upon receipt. When you dispose of your staking rewards, you’ll incur a gain or loss depending on how the price of your crypto has changed since you originally received it.
Example
Roger earns £800 ETH from staking.
Later, he sells his ETH for £1,000.
Roger recognizes £800 of income and £200 of capital gain.
Capital Gains Tax
Income Tax
How are airdrops taxed?
According to the HMRC, cryptocurrency received from airdrops may be considered income if it’s given in exchange for a product or service.
Cryptocurrency from airdrops is not considered income if it meets the following two conditions:
- It’s not part of a trade or business that involves cryptocurrency exchange tokens or mining
- The investor did not take any action to receive the airdropped cryptocurrency.
To better understand how airdrops are taxed, consider the 2021 $ENS airdrop. In this case, anyone who previously used the Ethereum Naming Service was entitled to claim $ENS tokens. It’s likely that this would be considered a taxable event since the tokens were given in exchange for using a service.
Whether or not your airdrop rewards are considered income, disposing of your airdropped cryptocurrency is considered a taxable event subject to capital gains tax.
TAX DEDUCTIBLE
How are transaction fees and gas fees taxed?
Any fees involved in acquiring or disposing of your crypto can be added to your cost basis. This includes any transaction fees and gas fees.
Reporting gas and transaction fees come with benefits from a tax perspective. In the event that you sell your crypto at a profit, a higher cost basis can reduce your capital gains tax.
Tax free
Capital Gains Tax
How are crypto gifts taxed?
Giving a crypto gift to your partner or spouse is considered tax-free. In addition, this will not be counted towards your capital gains allowance for the year.
On the other hand, giving a crypto gift to someone other than your spouse or partner is considered a taxable disposal. You will need to keep a record of the fair market value of your cryptocurrency at the time the gift was given to calculate your capital gains or losses.
TAX DEDUCTIBLE
How are crypto donations taxed?
If you choose to donate cryptocurrency to charity, you are entitled to Income Tax relief. If you are a higher-rate taxpayer, you’ll be able to claim the difference between your rate and the basic tax rate based on the fair market value of your crypto at the time it was donated.
However, you may be required to pay capital gains tax in the following circ*mstances:
- The fair market value of the cryptocurrency is higher than it was when you received it
- In the case of a tainted donation (when a taxpayer makes an arrangement with a charity to obtain a financial advantage)
Capital Gains Tax
Income Tax
How are NFTs taxed?
NFTs are taxed similarly to cryptocurrencies. However, NFTs are not subject to the same shared pool accounting rules.
How is buying and selling NFTs taxed?
If you are buying an NFT with cryptocurrency, you will incur a capital gain or loss depending on how the price of the cryptocurrency you are using to make the purchase has changed since you originally received it.
Example
Cassie buys £300 of Ethereum.
The value of her Ethereum increases to £400.
Cassie trades her Ethereum for an NFT.
Cassie incurs £100 of capital gain.
If you are selling an NFT, you will incur a capital gain or loss depending on how the price of your NFT has changed since you originally received it.
Example
Robert buys an NFT for £300.
He later sells his NFT for £500.
Robert incurs £200 of capital gain.
How is creating an NFT taxed?
If you are minting an NFT in the act of a trade or business, any earnings from primary and secondary sales will be considered business income and will be taxed accordingly.
Capital Gains Tax
Income Tax
How is DeFi taxed?
According to HRMC, DeFi transactions can be subject to capital gain or income tax depending on the specific nature of the transaction.
How are DeFi staking rewards taxed?
DeFi staking rewards may be subject to capital gains or income tax depending on the specific mechanisms of your DeFi protocol.
In some situations, staking can be considered a taxable transaction subject to capital gains tax. For example, some protocols may require you to deposit ETH to receive stETH. It’s likely that this transaction will be seen as a crypto-to-crypto trade and taxed accordingly.
In other situations, earning staking and liquidity mining rewards is more likely subject to income tax. If you receive rewards in the form of new tokens in your wallet, this will likely be seen as income.
How is DeFi liquidity mining taxed?
Adding/removing cryptocurrency from a liquidity pool is likely subject to capital gains tax.
For example, adding cryptocurrency to a liquidity pool and receiving LP tokens in return will likely be considered a crypto-to-crypto trade. You’ll incur a capital gain or loss depending on how the value of your crypto changed since you originally received it.
How are DeFi loans taxed?
Currently, many DeFi protocols offer loans to users. When a user locks up their existing cryptocurrency as collateral, they can receive tokens in return. For example, you could put ETH as collateral and in exchange, receive DAI.
Lending collateral to a DeFi protocol typically is not a taxable event. HMRC has given guidance detailing circ*mstances when submitting collateral can be considered a taxable disposal, which may occur when your collateral gets moved to another platform.
TAX DEDUCTIBLE
Claiming losses on worthless assets/lost keys
If you hold a crypto-asset that becomes worthless, you can file a negligible value claim. This allows you to treat the asset as if you’ve disposed of it, even if you still hold it. You’ll also be able to claim the associated capital loss.
What should be included in my negligible value claim?
Your negligible value claim should include the following information.
- The type of crypto-asset
- The amount at which the asset should be treated as disposed of (typically £0)
- The date the ‘disposal’ should take place
Can Iclaim losses on lost keys?
A negligible value claim can also be filed in the case that you lose your private keys. This claim should be filed in the same year that you lost access to your cryptocurrency.
Is there an inheritance tax on crypto?
In the United Kingdom, inheritance tax applies if the total value of the estate exceeds £325,000. This includes the fair market value of crypto and NFTs on the date of death.
Is there VAT on crypto?
There is no Value Added Tax (VAT) for exchanging fiat currency for crypto (and vice versa).
However, if you use cryptocurrency to purchase goods, you will be subject to standard VAT.
Will I pay business tax on cryptocurrency?
In some cases, an individual trader may be treated as a business for tax purposes.
However, it’s unlikely that most taxpayers will fall into this category. Here’s what the HRMC has to say about this issue:
‘Only in exceptional circ*mstances would HMRC expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself.’
If your trading activity does rise to the level of a business, your cryptocurrency gains will be subject to income tax rather than capital gains tax.
How can I calculate my cryptocurrency capital gains?
To calculate your gains and losses from cryptocurrency disposals, you can use the following formula:
Fair Market Value - Cost Basis = Gain/Loss
Fair Market Value is the market price of the cryptocurrency at the time you sold, traded, or disposed of it. Cost Basis refers to the amount it costs you to acquire the coin.
To calculate your cost basis for a given cryptocurrency, you can use the shared pooled accounting method (more on this in the next section).
How do I determine my cost basis?
Calculating capital gains and losses from your crypto transactions becomes more complex when you have multiple transactions to account for. The UK requires a specific type of method for calculating the cost basis of your coins known as Shared Pool Accounting.
With the shared pooled accounting method, you are essentially taking an average of the costs you have incurred to acquire your crypto. These averages can be used to calculate your cost basis per coin. Each cryptocurrency has its own shared pool for determining basis.
Example:
Let’s take an example of a crypto investor who buys Ethereum at multiple price points in a given year.
In this example, Emma has a total pool of 2.5 ETH prior to her October sale. To calculate her cost basis on a per ETH basis, we need to average out her total costs.
Her allowable costs for her total pool of 2.5 ETH are £4,000 (May buy of £1,500 plus August buy of £2,500). We then simply divide her total allowable costs by her total pool of ETH.
£4,000 / 2.5 ETH = £1,600/ETH
As you can see, Emma’s cost basis per ETH in her shared pool is £1,600.
We can use the equation from above to calculate Emma’s capital gain from the sale of her 1 ETH in October.
Fair Market Value - Cost Basis = Gain/Loss
£3,000 - £1,600 = £1,400 Gain
Emma recognizes a £1,400 capital gain from selling her 1 ETH in December.
How does claiming capital losses work?
In the United Kingdom, capital losses can be used to offset your capital gains for the year. If you have a net loss for the year, it can be carried forward into future tax years.
As a result, claiming capital losses can significantly reduce your tax liability, and even bring your total taxable gains below the tax-free allowance amount of £6,000.
However, it’s important to remember that there are some restrictions on claiming capital losses. The Same Day Rule and the Bed & Breakfast Rule are designed to prevent investors from claiming losses solely for tax purposes.
What is the Same Day Rule and the Bed & Breakfast Rule?
There are two additional rules that apply to crypto disposals in the UK: the Same Day Rule and the Bed & Breakfast Rule.
Each of these rules are designed to prevent wash sales, which is a scenario in which an investor intentionally sells or disposes of an asset that has decreased in value and then buys it back soon after. The Same Day Rule and the Bed & Breakfasting Rule exist to eliminate the potential tax benefits of wash sales.
The Same Day Rule explained
If you buy and sell a cryptocurrency the same day, then the sale is considered made from the coins you bought on that same day.
That means the cost basis for your sale will be the acquisition cost of the crypto you bought on the same day. This will be the case even if the acquisition of the crypto takes place after the sale — as long as they are both on the same day.
The Bed & Breakfast Rule explained
Also known as the 30-day Rule, the Bed & Breakfast Rule states that any of the crypto you acquire within 30 days of a sale will be used as its cost basis.
Each of these rules impacts which cryptos you “sell” and the order you sell them in from an accounting perspective.
When calculating your gains and losses and applying these three rules, your cryptocurrency will be treated as being disposed of in the following order:
- Same Day Rule: Coins acquired on the same day as the disposal. If you are selling more than you bought on the same day, move on to the next rule.
- Bed and Breakfasting Rule: Coins acquired in the 30 days following the day of disposal. If you are selling more than you bought within the 30 day period, move on to the next rule.
- Crypto-pool accounting: All previous coins purchased, price averaged.
What records should I keep for my crypto taxes?
To accurately report your taxes, you should keep the following records for all of your cryptocurrency transactions. These records can prove useful in the event of an HMRC inquiry.
- Type of cryptocurrency
- Date you acquired your crypto
- Date you disposed of your crypto
- Fair market value of your crypto at receipt in pounds sterling
- Fair market value of your crypto at disposal in pounds sterling
- Relevant wallet address and bank statements
- A record of pooled cost before and after the disposal
Tracking this information can be difficult — especially if you’ve transferred your crypto between different wallets and exchanges.
Luckily, there’s an easier way. Crypto tax software like CoinLedger automatically connects to your wallets and exchanges to help you generate a comprehensive tax report in minutes.
How to report cryptocurrency on your taxes
To report your crypto transactions and pay your capital gains tax, you can use the HMRC’s Government Gateway online service. Here, you’ll be able to fill out a Self Assessment Tax Return and a Capital Gains Tax Summary.
Keep in mind, the HMRC requires you to keep records of all of your cryptocurrency transactions for at least a year after the Self Assessment deadline.
Pro Tip: In the Spring Budget 2023, the Chancellor of the Exchequer announced that the Self Assessment Tax Return will change and that crypto assets will need to be reported separately. However, these changes won’t come into effect until the 2024-2025 tax year.
Looking for an easy way to generate a comprehensive crypto tax report with records of all of your transactions? Crypto tax software can help you accurately track and report all your crypto activity — across all of your wallets and exchanges!
Why can’t my crypto exchanges give me capital gains and losses forms?
Due to the transferable nature of cryptocurrencies, exchanges don’t typically know the cost basis of your assets. This prevents them from being able to give you complete gains and losses reports.
To illustrate this further, let’s look at an example.
Example:
In this example, Coinsmart has no way of knowing Mark’s cost basis of his 1 BTC. Coinsmart only can see Mark trading his Bitcoin for Ethereum. They have no idea when, for how much, or where that BTC was originally acquired.
Because of this, Coinsmart can’t possibly tell Mark what the capital gain or loss was on his BTC trade for ETH. It’s missing an essential piece of the equation: cost basis. As a result, the platform can’t calculate his capital gains and losses.
This example demonstrates this problem at a small scale. Transfers happen all of the time, and it’s the transferability of crypto that makes it difficult for cryptocurrency exchanges to report capital gains and losses on your behalf. The reporting burden falls to you as the taxpayer.
To summarise, the second you transfer crypto into or off of your cryptocurrency exchange, the exchange loses the ability to report on your gains and losses. Exchanges like Coinbase even explain this to users:
How CoinLedger can help
There’s no need to track all of your transactions on a spreadsheet. CoinLedger can help you report your cryptocurrency taxes in three simple steps.
- Connect your wallets and exchanges.
- Let the platform automatically pull your transactions and calculate your tax bill!
- Download your tax report!
Whether you’re using an exchange like Coinbase or a blockchain like Ethereum, Coinbase has got you covered! Once you’ve downloaded your tax report, you can file it yourself or send it off to an accountant.
Get started with CoinLedger and join the 500,000 investors worldwide who use the platform to take the stress out of tax season!
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