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Crypto Tax UK: Do You Have To Pay Tax On Cryptocurrency?

Jun 15 2022 | Legal

by Joseph Navas

by Joseph Navas

Head of Litigation

In this article

When do you have to start paying crypto tax?

There are a number of activities that will result in you having to pay crypto tax. These include:

Buying and selling crypto – profiting off of your crypto means you’ll likely have to pay capital gains tax. If you make a loss, this could minimise your capital gains bill. However, the first £12,300 you earn per year is not taxed.

Being paid with crypto – receiving payment in crypto means that you’ll be subject to income tax and national insurance. The amount of income tax you pay will be determined by which tax bracket you are in, as detailed further down the article.

Inheritance – as crypto is technically property in the UK, it is subject to inheritance tax. This means that if the estate is worth over £325,000, a tax fee will affect any amount that exceeds this limit. For example, if you are due to inherit £500,000 worth of crypto, you’ll be taxed 40% of £175,000 (£70,000).

Mining crypto – when mining crypto as a business, any income made is taxable as it falls under trading profit. This also applies to any gains made when disposing of your cryptocurrency too. On the flip side, mining as a hobby is slightly different. If you receive an income or a reward for mining, these will both be subject to crypto tax. Later down the line, when disposing of assets, you’ll be subject to capital gains tax too.

When am I not subject to crypto tax?

It is true that most crypto-related activities will result in taxation. However, simply handling crypto isn’t enough to result in taxation.

Some examples of where crypto tax does not apply include:

  • Holding crypto
  • Transferring crypto between your own wallets
  • Buying crypto with fiat currency i.e. legal tender
  • Gifting crypto to a spouse

In essence, if you are not directly earning or gaining, then crypto tax does not apply to you.

What about airdrops?

Airdrops are essentially free tokens sent out to try and entice recipients into engaging with the crypto. For example, you may receive a crypto token for following a social media account, or signing up for updates on their website.

These work in the same way as promotional vouchers sent to your email. In both cases, they are trying to bring new customers in.

In the UK, airdrops do not require you to pay crypto tax. However, if you later down the line decide to dispose of the token, you may be subject to capital gains tax.

Crypto Tax - When Does It Apply

What about swapping cryptocurrencies?

If you decide to simply swap between cryptocurrencies, you are still liable to taxation as it is still considered as a disposal. Even though you are exchanging for a different token, you may be profiting from what the original value of your cryptocurrency was worth.

Here’s an example…

Let’s say that, in January, you decide to buy some Binance Coin when it’s worth £200. Later in the year, come September, you decide to swap it for Tether. However, at this point in time, the price of Binance Coin has risen to £220. Because of this, you’ll now be receiving a 10% increase in Tether purely because of the increasing price of Binance Coin.

Whilst in this example the price increase wasn’t massive, regular occurrences or a one-off large swap will definitely be liable for taxation. Because of this, it’s vital to keep records of all disposals for crypto tax purposes.

Remember...

You won’t be liable to taxation if you haven’t exceeded your yearly capital gains tax allowance of £12,300. This is includes any disposal of crypto, whether it be for another token or for fiat currency.

How can I calculate my financial gain?

To account for the ever-fluctuating nature of crypto, there a series of rules in place to help calculate the ‘true’ value of your trades. The implementation of such rules are purely to cover any bases where people can avoid paying tax. These are:

The ‘same-day’ rule

Any cryptocurrencies or tokens acquired or disposed of on the same day will fall under one transaction. This groups them together to work out an average cost or amount received through the trade.

This means that the costs for any sales you make will be the same cost as when you first acquired the crypto. This is true as long as it all occurred on the same day.

The ‘30-day’ rule

Any cryptocurrencies or tokens acquired or disposed of in the last 30 days will fall under one group to work out the average cost. This only applies when the previous rule is not valid.

The ‘pooling’ rule

When the previous rules cannot be applied, all crypto bought must be put into a group with the average price worked out. This is usually due to it being unmatched by any other recent transactions.

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