UK Cryptocurrency Tax Guide
People say that there are only certain things in life are death and taxes. Well, we can’t help you with your mortality but we can give you some advice regarding the other thing that is taxes. The best thing is to get in front of your tax liability when you are dealing with cryptocurrency and other digital assets. In cryptocurrency transactions, tax rules are moreover complicated in terms of different liabilities, such as stamp duties, corporation tax, and income tax. HMRC provides a lot of information that makes you understand crypto rules.
If you want to know more about cryptocurrency tax in the UK and other things related to it then keep reading. Not just in the UK but many other countries have passed a rule and regulation related to cryptocurrencies for the tax liability. Although we will not be able to provide information about all countries in a single article so, here we are going to provide information about Tax on Cryptocurrency in the UK.
How HMRC works?
HMRC (Her Majesty’s Revenue and Customs had issued tax guidance on Cryptocurrency and digital assets on March 30, 2021. This HMRC guide broke the UK’s cryptocurrency tax rule so that people can easily comply. Before the release of the guidance, HMRC reaches an agreement with Coinbase to disclose information of the user who is carrying more than 5,000 worth of crypto assets. This was done on the platform during the tax year of 2019-20.
Now, the most important thing which you need to know is that HMRC may decide to treat you as a business instead of an individual. So, how will HMRC decide whether you are a crypto trader or an investor? It depends on the several factors which they consider.
- The number of transactions
- Frequency of transaction
- How abundant time does one pay on activities?
How HMRC Taxes Cryptocurrency?
HMRC treats cryptocurrency as a token rather than the usual currency and money. Below are the four types of cryptocurrencies treated as a token:
- Exchange token: It is used to make payments like Bitcoin.
- Utility token: It provides the holder with a right to access goods or services.
- Security token: It gives the holder the right to profit and loss in a business.
- Stable coins: These are the types of coins that are pegged to another asset with a stable value such as fiat currency or precious metals.
General HMRC rules on crypto taxation
HMRC taxes on cryptocurrency depend on how you deal with crypto and other digital assets. When you hold cryptocurrency as a personal investment, you will be liable to pay your taxes based on Capital Gains Tax rules. So, you have to pay taxes based on capital gain you will dispose of cryptocurrency.
Capital Gain= GBP value of Disposed asset at a time of disposition – GBP value of the disposed asset at the time it was acquired
Disposal for capital gains has been defined by HMRC as
- Selling crypto assets for the money
- Exchanging cryptocurrency assets for a different type of crypto assets
- \Using cryptocurrency and other digital assets to pay for goods and services
- Giving away cryptocurrency to another person for the sake of return
When you trade cryptocurrency as a business activity, you will be liable to pay taxes based on the Income Tax rule. It doesn’t matter what kind of business activity you are involved with, HMRC just encourages you to look into financial trader rules. They do it to determine whether you have a trading business or not. Any reward and fees in the business activity will also be considered.
How Much Tax Do You Have to Pay on the Crypto?
- Your capital gain rate will be 20% if you are an additional rate taxpayer.
- And if you are a basic taxpayer, your tax rate will depend on your taxable income after deducting any allowances.
How to Minimize Your Tax Burden?
Even though tax rules are related to HMRC still, you can save yourself from incurring unnecessary tax liabilities. All you need is to pay attention to such rules related to cryptocurrencies and taxes. Below are the certain things which you can claim or not.
- Make use of your annual capital gain allowances by deducting them from your total gain There are certain limits for every individual or a business to pay a certain rate of interest. In case, you exceed the limit, you will be liable to pay taxes. These limits sometimes work wonders and you can get allowances for different activities.
- Offset your crypto losses- When an individual sells crypto for less than it cost money, they will create a loss in the transaction. These losses can be shown as offset and get deducted from your total capital gain. By doing this, you can decrease the tax percentage on your capital gain.
- Claiming losses for defunct coins or crap coins- Sometimes your crypto can become negligible when it will start fluctuating and become worthless. In such cases, the owner of the crypto can file a negligible value claim and they can benefit from it. You will be allowed to write off such losses and it will lead to an increase the tax liability on the crypto assets. You may check out the Crypto Method platform if you are planning to invest in Bitcoins.
Finally, it’s worth noting that HMRC has passed certain rules on crypto assets and other digital assets for both an individual investor and a business. In the mining business, crypto assets will be treated as trading stock and they can be disposable after a certain period. Several factors have to be considered before you calculate tax liabilities. Make sure that you are deducting specific allowances while calculating the cryptocurrency tax.
We hope you find this information useful related to the UK Cryptocurrency Tax Guide. Also, if you are a cryptocurrency trader who works as an individual or with a firm, you can share your experience by leaving a comment. If anyone else has any queries related to cryptocurrency and tax liability, feel free to reach us, we will be grateful to help our readers.