Investing in cryptoassets may result in taxable income, losses, or gains. For some actions, you may also receive taxable income in the form of cryptoassets. Regardless of your circumstances, it is advisable to comprehend how HMRC tax cryptocurrencies before delving deeper into the world of bitcoin. We go over the fundamentals on this page from the standpoint of UK taxes.

If you don't have time to read the entire HMRC guidance for individuals with bitcoin holdings, which is available here, our in-depth guide provides a deeper look at all the information you want on cryptocurrency taxes in the United Kingdom.

The HMRC handbook on cryptoasset taxes is open to the general public. HMRC's interpretation of how UK tax laws should be applied is outlined in manuals intended for HMRC employees. Therefore, the manuals can help taxpayers and their advisors comprehend how HMRC has interpreted the legislation. An outline of HMRC's approach on taxing cryptoassets is given in this note.

What are cryptoassets?

Cryptoassets are a specific form of digital asset. Although there are hundreds of other kinds of cryptocurrencies, the most well-known ones are Bitcoin and Ethereum.

Another kind of cryptoasset is non-fungible tokens (NFTs). NFTs are defined in a number of internet articles, including those from the Financial Times and the BBC.

Cryptocurrency and cryptoassets are not the same as "regular" money like US dollars or British pounds. They differ from shares and stocks. However, cryptoassets have several characteristics in common with each of these asset kinds. For instance, cryptoassets can occasionally be used as a means of payment, much like "regular" currency.

HMRC does not view buying or selling cryptoassets as gambling or as a form of money or currency. In other words, HMRC believes that gains or profits from the buying and selling of cryptoassets are taxed.

When do you pay tax on crypto?

The amount of taxes you must pay depends on whether you sell or earn cryptocurrencies.

Depending on the duration that you owned the cryptocurrency, you can owe capital gains taxes or regular income taxes when you sell it and realise a profit on your investment. You will be subject to the higher regular tax rates if you owned it for less than a year.

You must pay your usual income tax rate on any cryptocurrency that you obtain through mining, promotions, or purchases of products and services. Otherwise, it is considered regular taxable income.

According to HMRC's published guidelines, the cryptoasset's tax location is determined by where the beneficial owner resides. As a result, income tax or capital gains tax (CGT) are levied on any cryptoassets that taxpayers who reside in the UK dispose of. It is crucial to remember that the courts have not yet had a chance to test this; it is only advice. Anyone from casual hodlers to degen fanatics may find the topic of cryptocurrency taxation in the UK to be difficult. But it's important to know what your tax responsibilities are. Not only is it required by law, but it also facilitates transaction planning and minimises your tax liability.

Types of Cryptoassets for Tax Purposes

Let us examine the many categories of cryptoassets:

Exchange Tokens: The main purpose of these tokens is to facilitate payments. However, their potential for value growth is another reason why a lot of people are investing in them.

Utility Tokens: These resemble passes for exclusive access. Having utility tokens gives you access to particular products or services on a platform—typically one that runs on DLT.

Security Tokens: Security tokens are similar to holding a tiny digital portion of a company. They stand for a variety of rights in a business, including ownership and the need to pay back debts.

Stablecoins: Stablecoins are like a tranquil refuge in the wild world of cryptocurrencies. Because they are linked to a more stable asset, such as US dollars or precious metals like gold, they are intended to have a constant value.

TAXATION – INDIVIDUALS

Income tax

If someone is seen to be "trading" in cryptocurrency, they will be liable for income tax on the gains they make from selling such assets. Returns on cryptocurrency assets obtained through mining or staking may be subject to trade or miscellaneous income taxes, depending on the specifics of the situation. Additionally, the value of cryptocurrency assets that are airdropped to a person can be liable to income tax. In addition to income tax, National Insurance Contributions (NICs) paid with cryptoassets also subject to taxation. In cases where non-communicable illness (NIC) is owed, both the employer and the employee are responsible for paying employers' NIC.

Class 1 National Insurance contributions (NIC) are withheld from employees' salaries at a rate of 10% instead of 12% as of January 6, 2024. Class 2 NIC will no longer be payable as of April 6, 2024, while self-employed class 4 NIC will drop from 9% to 8%. Individuals who earn less than £6,725 annually are still eligible to receive certain state benefits provided they continue to pay class 2 NIC.

Capital Gain Tax (CGT):

If you make a profit or "gain" from the sale, donation, exchange, or other disposal of an asset, you are subject to capital gain tax (CGT).

The profit you make is what is subject to taxes, not the sum of money you are paid for the item. Among these transactions are:

• Selling cryptocurrency for fiat money (including winnings from airdrops, lending, staking, and liquidity mining, among other things).

• Trading one cryptocurrency for another (such as gains from airdrops, lending, staking, and liquidity mining, for example).

• Gifting cryptocurrency (except spouses and civil partners).

· Spending cryptocurrency on products and services

• Offering NFTs for sale

The tax-free allowance establishes a limit on the profit you can sell your cryptoassets for before paying capital gains tax (CGT).

For individuals and personal representatives, the Capital Gains Tax-Free Allowance for the tax year 2022–2023 was set at £12,300; for most trustees, it was £6,150. This implies that you would not have to pay CGT on gains up to £12,300 made during that tax year.

For the tax year 2023–2024, however, the allowance has been lowered to £3,000 for the majority of trustees and £6,000 for individuals and personal representatives. Because the tax-free buffer is now lower, it's critical to be aware of this change and strategically arrange your cryptocurrency transactions.

To further understand this, let's look at an example. Let's say you earn £50,000 a year and have gained £13,000 from selling Bitcoin.

· To start, deduct your tax-free allowance from your entire gain (gain = £13,000 - allowance = £6000) to arrive at £7000. Your taxable gain is £7000.

· The capital gains tax rate on cryptocurrency is 20% if you are a higher rate taxpayer. That means you will pay £1400 (or 20% of £7000) in taxes.

Airdrop

Receiving a portion of cryptoassets as part of a marketing or promotional effort is known as an airdrop. In general, cryptoassets obtained through an airdrop will probably be regarded as investments, and any later sales will be subject to capital gains tax.

VAT

According to HMRC, when products or services are sold in return for cryptocurrency, VAT is due in accordance with standard procedures.

When it comes to providing or organising the supply of cryptocurrency, HMRC takes into account a number of factors and, in every instance examined in their manual, comes to the conclusion that the subject matter is either not covered by VAT or is not subject to it. 20% is the standard VAT rate.

Inheritance tax

A deceased person's estate in the UK is subject to inheritance tax, which also applies to any cryptocurrencies they may have held. As assets, cryptocurrencies are liable to Inheritance Tax if the estate's total value surpasses the £325,000 threshold.

In order to calculate the tax value of cryptocurrency holdings, one should use the market price in British pounds on the day of death. Maintaining correct records is essential since HMRC might ask for them.

There is a 40% inheritance tax rate. If ten percent or more of the net worth is donated to charitable organisations, it can be lowered to 36% on certain assets.

TAXATION – CORPORATION

Corporation Tax

If your limited business is currently operating and liable for Corporation Tax, you must notify HMRC within three months of the commencement of your tax accounting period.

Corporation Tax applies to income from limited companies.

• Foreign businesses with offices or branches in the UK

• Uncorporated associations, such as community groups or sports clubs.

If your firm is based in the United Kingdom, it must pay Corporation Tax on any income earned in the country as well as outside.

If company resides outside, the only income subject to corporation tax is that which comes from your business's activities in the UK, when company is not headquartered in UK.

HMRC Cryptoassets Taxation guide