This article is part of TokenTax's Cryptocurrency Tax Guide.
The HMRC (Her Majesty's Revenue and Customs) has released fairly comprehensive guidelines for filing taxes on cryptocurrency in the U.K.. The tax regulations cover crypto trading, payments, income, mining, gifts, and business activity. The tax deadline for paper filing is 31 October 2020 and 31 January 2021 if filed online for the previous tax year ending on 5 April 2020.
UK Crypto tax filing information
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.
When you need to pay crypto taxes in the U.K.
You only have to pay capital gains tax on overall gains above the annual exempt amount of £12,000 (for the year 2019–2020). If your total assets sold was over 4x this amount (£48,000), you still need to report the gains on your tax return regardless of the gains amount.
Individuals are liable for income tax for crypocurrency received via mining, airdrop, and confirmation rewards as well as crypto received as salary from an employer. Furthermore, if an individual runs a business making profit from trading cryptocurrency, income tax rules take priority over capital gains.
Noteworthy in the report is that "HMRC does not consider the buying and selling of crypto assets to be the same as gambling." The department had previously claimed that cryptocurrency transactions could be "so highly speculative" so as to not be taxed; however, this new report definitively closes any such loophole.
U.K. Crypto capital gains and losses tax
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.
Regarding giving away crypto: if the recipient is not the spouse or civil partner of the giver, the pound sterling value must be calculated and then treated as capital gains for the recipient, even if the crypto is not converted to fiat. Crypto assets donated to charity are not applicable to capital gains tax, unless the donation is more than the acquisition cost or unless the donation is a tainted donation.
Allowable costs can be deducted when calculating a 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. The loss must be reported to HMRC.
Tax implications for trading crypto
Exchanges of crypto for fiat or crypto for another crypto are both taxable events. The HMRC has regulated cryptocurrency transactions as capital gains for individuals, and there are different tax brackets depending on both the individual’s gains and their income level. Capital losses can also offset these gains if reported within four years of the loss. Additionally, you can claim total losses for crypto if the value has dropped to zero or a minimal amount.
Wash sales are disallowed by not allowing cost basis to be transferred on same-day trades. The HMRC has also disallowed capital loss deductions for year-end losses bought back within 30-days for tax liability reduction purposes.
Tax implications for crypto pooling, hard forks and airdrops
Pooling practices applied to shares and securities also apply to crypto. Each cryptocurrency is kept in its own pool. The pound sterling originally paid for the crypto creates the pooled allowable cost, which changes as crypto of that type is acquired or disposed of.
If you sell a crypto and then reacquire the same asset within 30 days, the newly acquired assets are given their own pool, and gain or loss is calculated within this new pool.
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.
Tax for direct crypto income
In the case of mining, transaction confirmation rewards, airdrops, or salary received in cryptocurrency, individuals are subject to income tax, the same as if the earnings were in fiat currency. Notably, they will be liable to pay income tax and national insurance contribution.
Income tax can also apply to where an individual runs a business trading crypto, thus having taxable trading profits.
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 can then be subject to capital gains tax when their gains are realized. The costs for mining typically cannot be deducted.
Negligible value claims
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.
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 tax software 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 “consistent methodology” when making the pound sterling valuation, and records should be kept of what methodology is used.
British crypto tax implications for corporations
If you are operating a business, such as professional trading or 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. Mining expenses can be deducted from the income earned; however, there is an additional National Insurance Contribution that you need to pay.