Her Majesty’s Revenue and Customs (HMRC), which is the department of the UK Government responsible for tax collection does not consider cryptocurrency assets to be money. However, the holders and users are liable to taxes depending on how they use the crypto assets.
Individuals and businesses are liable to different types of taxes depending on how they use their crypto assets.
Types of taxes on crypto-assets for individuals in the UK
There are three types of taxes that individuals may be liable to for holding or using crypto assets. These include;
- Income tax
- National Insurance contributions
- Capital gain tax
When is an individual liable to pay income tax and National Insurance contributions?
You may be liable to pay an income tax or national insurance contributions if you receive cryptocurrency tokens as income.
Crypto tokens received from cryptocurrency mining are taxed as other taxable income. But no tax applies if the received tokens are worth less than £1,000 or if you have received less than £2,500 from other untaxed income.
If you meet the criteria for paying the tax on other taxable income, you will be required to complete the self-assessment tax return.
You are also liable to pay an income tax and national insurance contributions if your employer pays you in cryptocurrency tokens. In this case, if the cryptocurrency tokens are easily convertible crypto assets, your employer can pay the income tax and national insurance contributions through the PAYE before they pay you. But if the crypto tokens are not easily convertible crypto assets, you may be required to pay the income tax yourself if your employer decides not to pay the PAYE.
Your employer should pay the income tax if:
- They pay you in cryptocurrency tokens only
- They are not able to deduct the full amount from your other wages
When is an individual liable to capital gain tax?
Capita gain tax applies when you sell cryptocurrency assets (tokens). This involves:
- Selling your cryptocurrency tokens
- Exchanging one cryptocurrency token for a different type of cryptocurrency token
- Using your cryptocurrency tokens to pay for goods or services
- Giving away cryptocurrency tokens to other people unless it is a gift to a civil partner or spouse.
It is however important to note that you are not required to pay taxes when you buy crypto tokens but you are liable to pay taxes when you sell the cryptocurrency tokens.
You are however liable to pay the capital gains tax only if the gains you make from selling the crypto assets get above the tax-free allowance (Annual Exempt Amount), which is currently set at £12,300 and £6,150 for trusts.
How to reduce your cryptocurrency tax bill
You can reduce your tax bill by deducting the losses you made and claiming relieves, which depend on the type of crypto asset.
You can also deduct the following allowable costs:
- The transaction fees paid before the transaction is added to a blockchain
- Any fee incurred for advertising for a buyer or seller
- Any fee incurred for drawing up the contract for the cryptocurrency transaction
- Any fees incurred during the valuation so you can work out your gain for a certain cryptocurrency transaction
To file your capital gains tax, you can either choose to complete a Self-Assessment tax return at the end of the tax year or use the Capital Gains Tax real-time service to report your capital gain tax immediately after a transaction.
The necessary records that you should keep
If you involve yourself in activities that attract capital gain tax, you should keep the records of all the transactions which include:
- The type of cryptocurrency token
- Date of the transaction
- Number of tokens you disposed
- Number of tokens left in your custody
- Value of the tokens in sterling pounds
- Wallet addresses and bank statements
- Pooled cost record for before and after disposing of any tokens
On the other hand, if you involve yourself in activities that attract income tax, you should keep a record of the cryptocurrency tokens you receive. This includes:
- The type of token you received
- The date you received the tokens
- The number of tokens you received
- The total number of cryptocurrency tokens in your custody
- The value of the crypto tokens in sterling pounds
- Bank statements
- The date you disposed of the crypto tokens
Types of taxes on crypto-assets for businesses in the UK
A company or business is liable to pay taxes if it involves itself in the following cryptocurrency activities:
- Selling and buying of cryptocurrency exchange tokens
- Exchanging crypto tokens for other assets
- Exchanging one form of crypto tokens for another form of crypto tokens
- Cryptocurrency mining
- Providing goods and services which are paid for in terms of cryptocurrency tokens
The type of tax the company of business will be liable to pay is however dependent on who is involved and the type of activities.
The following taxes apply for companies or businesses involving themselves in crypto activities:
- Corporation Tax (CT)
- Capital Gains Tax (CGT)
- Corporation Tax on Chargeable Gains (CTCG)
- National Insurance Contributions
- Income Tax (IT)
- Stamp Taxes
The amount of tax depends on the income, gains, profits, and expenditure of the company or business, which must be declared annually through a company tax return.