Guide to Crypto Taxes in the United Kingdom | TokenTax

    The HMRC (Her Majesty’s Revenue and Customs) has released fairly comprehensive guidelines for filing taxes on cryptocurrency in the UK. The tax regulations cover crypto trading, payments, income, mining, gifts, and business activity.

    The HMRC defines three types of crypto assets: exchange tokens (currency coins like bitcoin), utility tokens (tokens issued by a business with utility uses), and security tokens (tokens that represent a form of equity in a business). 

    The report’s guidelines apply to all forms of crypto, but it also acknowledges that for utility and security tokens, “different tax treatment may need to be adopted.” However, they have not clarified yet that these different kinds of tokens are treated differently.

    Crypto is not considered currency or money but rather an asset. The HMRC recognizes that most individuals hold crypto as personal investment, and they will pay capital gains tax when they “dispose” of the crypto — see below. 

    You only have to pay capital gains tax on overall gains above the annual exempt amount.

    For 2021/22, the annual exempt amount is £12,300

    Individual crypto activities that are taxable include:

    Gains over £12,300

    Income received from mining, airdrops, or rewards

    Crypto received as salary

    If an individual runs a business making profit from trading cryptocurrency, income tax rules take priority over capital gains.

    You calculate gain or loss for capital gains tax when disposing of crypto assets. The HMRC defines a disposal as selling crypto for fiat, exchanging one cryptocurrency for another cryptocurrency, and giving away crypto to another person (as a gift or in exchange for goods or services). You report capital gains and losses on supplementary pages SA108 of your SA100 tax return.

    Allowable costs can be deducted when calculating a gain or loss, such as the original purchasing amount, transaction fees, and professional costs (i.e. cost of drawing up trade contracts or appraisal costs) in relation to buying or selling the assets.

    Capital losses from crypto transactions can be taken into account for your tax liability. If crypto is disposed for less than its allowable cost (i.e. sold at a loss), then the loss can be deducted to reduce the overall capital gain. You can claim also total losses for crypto if the value has dropped to zero or a minimal amount. Losses must be reported to HMRC. 

    Your capital gains tax rates depends on your income rate band.

    Income rate band Capital gains tax rate
    £12,571 to £50,270 (Basic rate income band) 10%
    >£50,271 to £150,000 (Higher rate income band) 20%
    over £150,000 (Additional rate income band) 20%

    Regarding giving away crypto: if the recipient is not the spouse or civil partner of the giver, the pound sterling value must be calculated and then treated as capital gains for the recipient, even if the crypto is not converted to fiat. Crypto assets donated to charity are not applicable to capital gains tax, unless the donation is more than the acquisition cost or unless the donation is a tainted donation.

    Pooling practices applied to shares and securities also apply to crypto. Each cryptocurrency is kept in its own pool. The averages of the sums originally paid for that coin creates the average cost basis, which fluctuates as more of that token is acquired or disposed of.

    Average cost basis accounting can be manipulated to minimize capital gains tax liability, however. Therefore, profiting from wash sales is disallowed by the HRMC by matching acquisitions and disposals of the same asset by the same person in the following order:

    Tokens of the same crypto acquired and sold on the same day (Same Day Rule)

    Tokens of the same crypto sold and reacquired within 30 days (30 Day Rule)

    A single cost-averaged pool of the same crypto purchased before the disposal date (Section 104 or S104 holdings)

    In the instance of a hard fork, any allowable costs stemming from the initial acquisition pre-fork will be split between the original and new forks.

    Airdropped tokens go into their own pool unless the recipient already owns the same token. The value of the airdropped token does not come from an existing held crypto.

    In the case of mining, transaction confirmation rewards, airdrops, or salary received in cryptocurrency, individuals are subject to income tax, the same as if the earnings were in fiat currency. Notably, they will be liable to pay income tax and national insurance contribution. 

    Taxable income Tax rate
    Up to £12,570 (Personal allowance) 0%
    > £12,571 to £50,270 (Basic rate income band) 20%
    >£50,271 to £150,000 (Higher rate income band) 40%
    over £150,000 (Additional rate income band) 45%

    Income tax can also apply to where an individual runs a business trading crypto, thus having taxable trading profits.

    Fees and/or rewards from mining can either be income tax in the form of trading income or miscellaneous income depending on the degree of activity, organization, and overall commerciality. Crypto assets received from these activities can then be subject to capital gains tax when their gains are realized. The costs for mining typically cannot be deducted. 

    In the event that a cryptocurrency becomes worthless and/or untradeable, a negligible value claim can be filed in order to treat the asset as disposed of, and thus losses can be claimed.

    If you lose your private key, a negligible claim can be filed only if it can be proven that there is no chance of recovering the key.

    In the instance of theft or fraud, one cannot claim a capital loss. The only instance where the HMRC states a loss can be claimed is in the instance of being sold a cryptocurrency that then becomes worthless. In which case, a negligible value claim can be filed.

    If you are operating a business, such as professional trading or mining, your crypto holdings may be taxed as income instead of capital gains.

    However, the HMRC is very strict on business considerations, and it will very rarely consider an individual investor as a professional trader.

    The HMRC recommends keeping separate, individual records for crypto transactions in the event that an exchange only keeps records for a limited amount or time or if an exchange shuts down before a tax return is completed.

    Syncing your transaction history from all exchanges in tax software is one way to keep track of all of your data over multiple years with automated formatting in an organized fashion.

    Any gain or loss must be converted to pound sterling for the tax return, even in crypto to crypto trades. The HMRC says to use “consistent methodology” when making the pound sterling valuation, and records should be kept of what methodology is used.

    To stay up to date on the latest, follow TokenTax on Twitter @tokentax.

    This content was originally published here.

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