For a very long time, Bitcoin and other cryptocurrencies have been the dominant topic in many quarters. With the significant rise in the value of crypto in recent years, it’s difficult not to talk about them. It’s also easy to get lost in all the excitement about making a profit and forget about some crucial issues related to investing in crypto. One such issue is taxation.
Many UK crypto investors and traders believe they can avoid paying taxes on cryptocurrency assets. That could not be further from the truth. It’s a line of thought that can get you in trouble with the authorities.
This article explores everything you should know about taxation and cryptocurrency in the United Kingdom. You should read this if you want to go into cryptocurrency or are already in it and have questions about paying taxes. Let’s get right into it.
Is there a Crypto Tax in the UK?
Many cryptocurrency investors in the UK have no idea about the nation’s rules on taxation regarding crypto assets. The leading theory is that profits from crypto transactions are seen as lottery or gambling wins. Hence, such gains are not taxable.
Such a misconception is absolutely wrong. If you reside in the UK and trade cryptocurrencies, there are tax implications from doing so. If you’re wondering if you need to pay taxes on your bitcoin or other crypto assets, the answer is yes.
In December 2019, Her Majesty’s Revenue and Customs (HMRC) released a guidance document. The document contained information about crypto assets and covered exchange tokens. In addition, the document explicitly stated that the trading of Bitcoin and other cryptocurrencies is a taxable endeavour.
How Crypto Tax Works in the UK
The crypto tax in the UK has specific guidelines for individuals like yourself. They include the following:
- If you’re buying and selling cryptocurrencies as an individual, your gains are subject to the UK’s capital gains tax (CGT).
- If you buy and sell cryptocurrencies frequently, your profits are subject to income tax as trading income.
For employment or consultants, the HMRC says:
- If your employer pays you in cryptocurrencies as a non-cash payment, you may be liable to National Insurance Contributions (NIC) and Income Tax just as you’ll be if you receive cash payments.
One takeaway is that most cryptocurrency traders are most likely to pay capital gains tax on their crypto assets and not income tax. However, your specific situation can determine the kind of tax you have to pay.
Another thing you should note about how crypto works in the UK is the HMRC does not classify crypto assets as currency or money. Instead, it groups cryptocurrency into four major categories. These are:
- Stablecoins: These are cryptocurrencies pegged to fiat money or other assets’ values. Examples include Bitcoin and Ethereum.
- Exchange Tokens: These are crypto assets used as means of payment. An example is Bitcoin.
- Security Tokens: These are tokens with certain interests or rights in a business. These include ownership, entitlement to a stake in future gains, or repayment of a particular amount of money.
- Utility Tokens: These tokens give the holder access to certain services or goods on a platform, mostly using distributed ledger technology (DLT).
You should also note you have to pay tax on cryptocurrency for airdrops, mining, and confirmation rewards. If you mine crypto, take part in crypto airdrops, or get crypto rewards, you are liable to taxation.
The HMRC may also consider your capital losses from crypto assets as tax liability. If you sell your crypto at a loss, the loss may be deducted to reduce your overall crypto CGT. You may also be liable to pay tax when you exchange your crypto assets for other assets or fiat. We advise going through the HMRC Cryptoassets Manual to know what crypto taxes you have to pay in relation to your unique situation.
What Happens If I Avoid Paying Tax on Cryptocurrency?
The HMRC is proactive in its quest to ensure crypto traders don’t default on their tax payments. They regularly request info from Coinbase, Cex.io, eToro, and other crypto exchanges in the UK. After receiving and analysing info from crypto exchanges, the HMRC serves defaulting traders and investors with notices. It’s likely to continue with this move going forward.
Therefore, if you misreport your crypto CGT or avoid paying tax on cryptocurrency, it’s best to get your act right. If you don’t do so, you may find yourself on the wrong side of the law. If you default on your taxes and don’t heed the HMRC’s warning or notices, you may incur fines, heavy penalties, and even prosecution.
What Should I Do If I Misreport My Crypto Earnings?
If you discover an error in your crypto sales report, don’t hesitate to disclose this to the HMRC. In this case, you actually want to pay tax on your Bitcoin profit but made an error in calculations. If you discover this, don’t overlook it and sweep it under the carpet. The HMRC will find it later when going over its report. When it does, you’ll be in more trouble.
If you discover an error and reach out to the HMRC, you may incur lower financial penalties. Your honest disclosure may also reduce how much you’ll have to pay. You may still face the consequences for wrong disclosure, but they’ll be milder than when you fail to make it known and get found out.
How To Reduce My Cryptocurrency Taxes
Instead of seeking how to avoid paying tax on cryptocurrency, you should seek ways to minimise your tax payments. There are several ways you can reduce your tax burden.
By practising these measures, you will be able to pay tax on Bitcoin profit, save money and stay on the right side of the law.
Use Your Yearly CGT Allowance
You only have to pay Capital Gains Tax if you make a profit of over £12,000. This value is £12,300 for the 2020-2021 fiscal year. Therefore, if your capital gains from crypto gains fall below the value after calculation, it means you don’t have to pay CGT.
Balance Your Cryptocurrency Losses
If you sell your crypto assets at a price lower than their cost basis, you’ll end up having a capital loss. While this is not so good, you can offset your loss against your overall gains.
You can claim capital losses within four years from the end of the fiscal year in which they happened. For this to be possible, you have to report your capital losses to the HMRC. You can report these losses using the tax return itself or via a letter.
If you sell your crypto to a connected person, the price you sell is not the sale proceeds. Instead, the crypto’s market value on the day of the transaction is considered to be the sales proceeds.
According to the HMRC, if someone acquiring an asset has a connection with the person disposing of it, both of them are treated as parties to the transaction. A situation like this makes the market value rule operational. Also, if there is any loss on the transaction, it’s regarded as a clogged loss.
Claim Losses For Shitcoins or Defunct Coins
Shitcoins are cryptocurrencies with little to no value. Defunct coins are those that are no longer in existence. Cryptocurrencies are volatile and can rise or drop in value in an instant. Hence, it’s possible to own a cryptocurrency that is worthless or has negligible value.
If you find yourself in such a situation, it does not mean you can avoid paying tax on cryptocurrency. Instead, you can claim a loss on the low-value crypto asset by filing a negligible value claim. This negligible value claim makes it look as though the crypto assets were disposed of and re-acquired at the price you stated in your claim. Hence, you can write off a huge loss for the asset, which is now illiquid.
Your claim must contain the worthless crypto asset’s name and the amount to be regarded as disposed. It should also include the date of its deemed disposal. The effect of this claim is that you can offset it against gains once the HMRC gets to know about it. You can also make the negligible value claim and the loss to the HMRC simultaneously.
Make a Pension Contribution
When you contribute to a pension where you have net relevant earnings, you can reduce the CGT percentage when you pay tax on cryptocurrency. You can reduce your CGT from 20% to 10% by contributing to a pension. This reduction is because tension contributions extend an individual’s income tax band’s upper limit by the gross contribution paid.
For instance, if your gross contribution to the pension is £10,000, it’ll increase to the point where your higher rate tax becomes payable from £46,350 to £56,350, using 2018/2019’s limit. Hence, if your capital gain is within the extended personal allowance after adding it to your other taxable income in the gain year, your Capital Gains Tax liability will reduce to 10% from 20%.
Investing in an Enterprise Investment Scheme
One way to avoid paying tax on cryptocurrency is by investing in enterprise investment schemes (EIS). Gains made on EIS held for 3+ years are CGT-free. If EIS shares get disposed of at a loss, you can choose to set the loss value less the income tax relief given against the income for the year of shares disposal or any of the previous year’s income. You can take such a step instead of setting it against capital gains.
Instead of worrying about how to pay tax on Bitcoin profits, you can defer it if you invest your gain in a qualifying EIS company’s shares. Your gain may arise by disposing of any crypto asset. However, you must invest in the EIS company a year before or 3+ years after earning the gain.
You can hold the EIS shares for any duration. However, you’ll be charged the deferred capital gain anytime the shares are disposed of or the EIS legislation deems it. There is a drawback of EIS investments, and this has to do with them being riskier than traditional shares and stocks.
Transfer Your Crypto Assets to Your Civil Partner or Spouse
You can cash out your crypto profits without paying tax by transferring them to your spouse or civil partner. CGT exempts transfers between spouses. Hence, spouses or civil partners can transfer crypto assets between themselves using both CGT allowances.
What this means is that civil partners and married couples have doubled CGT allowance. However, transfers you make to your spouse must be genuine gifts.
Here, we have been able to provide valuable information about how to avoid paying tax on cryptocurrency. First, you learned how crypto tax works in the UK. With this new knowledge, you now know better about the misconception that there is no tax on your crypto assets.
It’s not all gloom, though. While you have to pay tax on cryptocurrency, you can reduce the tax you pay by following several steps above. These steps are practical and will lessen your tax burden.
Staying informed is an excellent way to remain ahead in the crypto world. Ensure you are always ahead of the game by checking out our website for cryptocurrency-related news, signals, and trading help. You will find many tips to help you make informed investment decisions and keep your assets stable despite cryptocurrencies’ volatile nature.