In Great Britain, income tax was first introduced in 1799, as a measure to cover the enormous costs of the Napoleonic Wars. As the conflict protracted, so too did the tax on people’s earnings become entrenched, never to recede again but only to increase over time.
Like in most countries, income tax eventually became progressive — increasing with the level of income. In the current year, the minimal personal allowance before taxation takes place is £12,500.
Beyond that level, there are three tax brackets in the UK:
- Basic tax rate of 20% between £12,501 to £50,000 income
- Higher tax rate of 40% between £50,001 to £150,000
- Additional tax rate of 45% beyond £150,000
Of course, there is a wide range of tax reliefs and allowances to take advantage of, so you are not hit with the full brunt of taxation.
For example, Marriage Allowance (applies to civil partnerships as well) provides an opportunity to free up £1,250 of your personal allowance to your partner. However, such conditions only apply if your income level is under the minimum for taxes to hit — £12,500.
Such conditions are interspersed throughout the tax law, which brings us to the issue at hand — how should you prepare for trading with cryptoassets in the UK?
This Guide Contains
UK’s Classification of Cryptocurrencies
Considering Bitcoin’s trading launch in 2010, it took the UK’s authorities eight years to start taxing gains from such virtual currency assets. In December 2018, HMRC — Her Majesty’s Revenue and Customs — issued a comprehensive guideline on taxing cryptoassets for individuals. With a few updates, later, here is the current state of cryptoassets taxation.
As you may already know, the UK doesn’t consider cryptocurrencies to be either currencies or legal tender. Hence, the name — cryptoassets.
This means that both individuals and businesses will be able to trade with three types of these tokens: exchange, utility, and security tokens. However, each type of cryptoasset can be taxed differently, not based on its definition, but based on its use scenarios.
Legally defined in the UK, these exchange tokens are all crypto coins that are designed to be used for payments, utilizing blockchain, which is DLT — Digital Ledger Technology. The underlying value of exchange tokens is based on their usage, instead of on centralized institutions.
UK’s Tax Treatment of Cryptocurrencies
Now that we know how cryptocurrencies are classified in the UK, it’s easy to figure out how they are taxed. In almost all cases, individuals holding cryptoassets are subject to Capital Gains Tax (CGT).
Whether receiving cryptoassets as airdrops, from mining, as transaction confirmation, or from employers, all such tokens are hit by CGT in addition to National Insurance contributions.
CGT is around 10% to 20% on cryptoasset gains, which depends on the income bracket you fall under. Be warned though, this may change according to the Principal of Hillier Hopkins, the long-standing Chartered Accountants firm:
“HMRC sees cryptocurrencies not as a currency but as investment assets and as such are subject to capital gain tax. The huge increases in Bitcoin in recent weeks will see HMRC take a keen interest where investors choose to cash-in on that growth.”
Income tax, instead of CGT, would only apply to businesses that generate trading profits in cryptoassets. This can go from 0% to 46%, depending on the income level and specific region.
However, it is extremely rare for HMRC to assess an individual’s cryptoasset activity to apply income tax. This is reserved for professional traders and businesses.
Moreover, trading in cryptoassets is treated differently from gambling. With that out of the way, here is how different cryptoasset activities are taxed.
You have already heard of Bitcoin using up as much electricity as a country. Depending on the time you’ve seen such a headline, the comparative country could range from Argentina to Switzerland. This enormous energy expenditure is expanded on the so-called mining.
These computers are called mining rigs, and recipients of mining rewards are called miners. Just for the month of January, Bitcoin miners received over $1.1 billion in mining earnings. Although each Bitcoin halving reduces mining rewards, the skyrocketing Bitcoin price more than makes up for it.
Accordingly, cryptocurrency mining in the UK is treated in two layers:
- If miners keep mining rewards, they have to pay CGT.
- If miners don’t engage in trading, they have to pay income tax on their mining rewards.
On top of that, fees or rewards for mining are subject to income tax, with regard to their risk, organization, degree of activity, and commerciality.
Of course, if these fees gain in value from the time of acquisition, they will be subject to CGT. Conversely, the accrued value will be counted for trading use cases.
Fintech companies often resort to airdrops — free token distribution into users’ wallets in order to increase awareness and usage of new tokens.
More often, users have to commit to some microtask — tweeting, following, registering, etc. — in order to receive these airdrops.
If airdrops are released freely, without requiring anything in return, they are exempt from income tax. On the other hand, if wallet holders are expected to perform some service for received airdrops, they are subject to income tax. This can be either miscellaneous or as trade receipts.
Predictably, once you sell airdropped tokens, you are liable to pay CGT. This applies even in the case the airdrop was not subject to income tax. As with mining, income tax takes precedence over CGT when the change of value is calculated.
UK Cryptocurrency Tax Law Compared to the EU
The European Union is still not unified enough to view it as a monolithic body. Many member-states have their own cryptocurrency tax models.
Accordingly, the EU taxation may range widely. For example, Germany (if under 600 Euro) and Slovenia don’t tax Bitcoin transactions, except for VAT.
Likewise, Malta has become a haven for cryptocurrency transactions due to its policy to not charge income or gain taxes on isolated transfers. Only crypto exchanges are taxed, falling under the general corporate income tax rate of 35%. Portugal is another EU nation without specific cryptocurrency taxation laws.
On the other hand, Romania charges a 10% tax on all cryptocurrency earnings above €126 annually.
Do You Need to Declare Your Cryptoassets?
When your cryptoasset activity can be subjected to CGT, it has to be declared to HMRC.
However, only when these conditions apply:
- If the cryptoasset gains fall above the Capital Gains Annual Exemption
- If the total gains — disposal value summed up — are 4X higher than the Capital Gains Annual Exemption
Disposal value is calculated by the inclusion of selling and exchanging cryptoassets, using them as payments and as gifts to non-partners/spouses.
In addition, charity donations are exempt from CGT unless they fall under “tainted donation”, or if the difference between charity donation and cryptoasset acquisition is high enough to constitute a gain.
Do You Need an Accountant?
An accountant will tell you what you should already know by reading to this point. The nature of using your cryptoassets will determine whether they are liable for CGT or/and income tax. For infrequent crypto traders, this is easy to follow, as almost always CGT will be applicable.
However, if the bulk of your income comes from frequent trading with multiple types of cryptoassets, acquisitioned in multiple ways, it may be best practice to seek advice from a professional accountant. At least for a while, until you are completely familiarized with the process.
No doubt, a professional accountant will take care of:
- Proper reporting of all your trading activity when it needs to be reported
- Seeking tax exemptions
- Determining if CGT or/and income tax applies
Therefore, you should balance out the cost of hiring an accountant with the value of activity you generate with cryptoassets.
Streamline Your Tax Calculation
After they gained the power of income taxation, governments like to tweak their “earnings” on a yearly basis. Therefore, be sure to check the status of your cryptoasset activity with the official governmental portals provided here.
Better yet, you can avoid the high cost of professional accountants by using software services. Crypto Tax Calculator is one of them, designed specifically for HMRC tax laws.
If you have less than 100 cryptoasset transactions per year, it may be worthwhile to pay the price of £39 per year to double-check if all of your crypto taxes are in order.
You may have heard that AI — machine learning — may disrupt white-collar work far more than those who work with their hands. The Crypto Tax Calculator is a perfect example of this. After all, it will always be exceedingly more expensive to construct physical robots than software algorithms.