Guide to Crypto Taxes in the United Kingdom

The HMRC (Her Majesty's Revenue and Customs) has released fairly comprehensive guidelines for filing taxes on cryptocurrency in the UK. The tax regulations cover crypto trading, payments, income, mining, gifts, and business activity.

The HMRC defines three types of crypto assets: exchange tokens (currency coins like bitcoin), utility tokens (tokens issued by a business with utility uses), and security tokens (tokens that represent a form of equity in a business). 

The report’s guidelines apply to all forms of crypto, but it also acknowledges that for utility and security tokens, “different tax treatment may need to be adopted.” However, they have not clarified yet that these different kinds of tokens are treated differently.

Crypto is not considered currency or money but rather an asset. The HMRC recognizes that most individuals hold crypto as personal investment, and they will pay capital gains tax when they “dispose” of the crypto — see below. 

You only have to pay capital gains tax on overall gains above the annual exempt amount.

In November of 2022, HM Treasury announced in their Autumn Statement that the annual exempt amount would change from £12,300 to £6,000 effective April 2023.

Individual crypto activities that are taxable include:

• Gains over £6,000 (as of April 2023; £12,300 for the 2022 tax year)

• Income received from bitcoin mining, airdrops, or DeFi rewards

• Crypto received as salary

If an individual runs a business making profit from trading cryptocurrency, income tax rules take priority over capital gains.

You calculate gain or loss for capital gains tax when disposing of crypto assets. The HMRC defines a disposal as selling crypto for fiat, exchanging one cryptocurrency for another cryptocurrency, and giving away crypto to another person (as a gift or in exchange for goods or services). You report capital gains and losses on supplementary pages SA108 of your SA100 tax return.

Allowable costs can be deducted when calculating a crypto gain or loss, such as the original purchasing amount, transaction fees, and professional costs (i.e. cost of drawing up trade contracts or appraisal costs) in relation to buying or selling the assets.

Capital losses from crypto transactions can be taken into account for your tax liability. If crypto is disposed for less than its allowable cost (i.e. sold at a loss), then the loss can be deducted to reduce the overall capital gain. You can claim also total losses for crypto if the value has dropped to zero or a minimal amount. Losses must be reported to HMRC. 

Your capital gains tax rates depends on your income rate band.

If you give someone crypto who is not your spouse or civil partner, the fiat value of the gift will be a capital gain for the recipient even if even the asset hasn't been cashed out.

Crypto donated to charitable organizations is not subject to capital gains tax, unless the donation is more than the acquisition cost or unless the donation is tainted.

Pooling practices applied to shares and securities also apply to crypto. Each token is kept in its own pool. The averages of the sums originally paid for that coin creates the average cost basis, which fluctuates as more of that token is acquired or disposed of.

Average cost basis accounting can be manipulated to minimize capital gains tax liability, however. Therefore, profiting from wash sales is disallowed by the HRMC by matching acquisitions and disposals of the same asset by the same person in the following order:

• Tokens of the same crypto acquired and sold on the same day (Same Day Rule)

• Tokens of the same crypto sold and reacquired within 30 days (30 Day Rule)

• A single cost-averaged pool of the same crypto purchased before the disposal date (Section 104 or S104 holdings)

In the instance of a hard fork, any allowable costs stemming from the initial acquisition pre-fork will be split between the original and new forks.

Airdropped tokens go into their own pool unless the recipient already owns the same token. The value of the airdropped token does not come from an existing held crypto.

If an individual mines crypto, receives an airdrop, or receives crypto for goods or services, those earnings will be subject to income tax and the taxpayer will have to pay the national insurance contribution.

Fees and/or rewards from mining can either be income tax in the form of trading income or miscellaneous income depending on the degree of activity, organization, and overall commerciality. Crypto assets received from these activities are be subject to capital gains tax when their gains are realized. The costs for mining typically cannot be deducted. 

In 2022, the UK published new guidance on the tax treatment of earnings from staking and DeFi lending. Essentially, it said that how these assets are taxed should be determined on a case-by-case basis.^[1] Some may be taxed as capital assets, while others may be income. The key determining question is whether the crypto earned in exchange for a service (income) or from an increase in value of an asset owned by a platform?

It provides the following list as factors to consider when determining how to report earnings:

• Whether the return to be received by the crypto lender/liquidity provider is known at the time the agreement is made. If the return to be received has been agreed, for example 5% per annum, this would indicate a revenue receipt. If the return to be received is unknown and speculative (and could result in a loss from the activity), this would indicate a capital receipt.

• If the return is realized through the disposal of a capital asset, this would indicate a capital receipt. If the return is paid by the borrower/DeFi lending platform to the lender/liquidity provider, this would indicate a revenue receipt.

• Whether the return is paid periodically throughout the period of the lending/staking or whether it is paid upon repayment of the principal. A one-off payment is more likely to have the nature of capital while a recurring payment is more likely to have the nature of income.

• Whether the period of the lending is fixed or indefinite, short-term or long-term.

In the event that a cryptocurrency becomes worthless and/or untradeable, a negligible value claim can be filed in order to treat the asset as disposed of, and thus losses can be claimed.

If you lose your private key, a negligible claim can be filed only if it can be proven that there is no chance of recovering the key.

In the instance of theft or fraud, one cannot claim a capital loss. The only instance where the HMRC states a loss can be claimed is in the instance of being sold a cryptocurrency that then becomes worthless. In which case, a negligible value claim can be filed.

If you are operating a business, such as professional trading or bitcoin mining, your crypto holdings may be taxed as income instead of capital gains.

However, the HMRC is very strict on business considerations, and it will very rarely consider an individual investor as a professional trader.

The HMRC recommends keeping separate, individual records for crypto transactions in the event that an exchange only keeps records for a limited amount or time or if an exchange shuts down before a tax return is completed.

Syncing your transaction history from all exchanges in a crypto tax calculator is one way to keep track of all of your data over multiple years with automated formatting in an organized fashion.

Any gain or loss must be converted to pound sterling for the tax return, even in crypto to crypto trades. The HMRC says to use and keep record of “consistent methodology” when making the pound sterling valuation.

Learn more about crypto taxes in other countries in our Crypto Tax Guide.