While cryptocurrency is a new asset and does not have regulations surrounding it, it is worth knowing if there is a tax on cryptocurrency in the UK. Her Majesty’s Revenue and Customs (HMRC) does not consider crypto assets as a form of money. It considers it as property. If you just hold cryptocurrency and it is not earning you an income, you are not liable to cryptocurrency tax UK. You are liable to cryptocurrency tax when you make an income from crypto assets. As such, you can avoid cryptocurrency tax UK by not selling them.
Is Cryptocurrency Taxed?
How the crypto tokens are used is what determines whether they will be taxed or not? For instance, Bitcoin is an exchange token and is mostly used as a method of payment. In such a case, if you hold bitcoin, then you will be liable for taxes on crypto gains from the profit you make while investing in bitcoin.
How Cryptocurrency Tax UK Works
As a Citizen of the UK, you are liable to taxes on the income you receive from investments. Most people hold cryptocurrencies as a form of investment. The HMRC considers cryptocurrencies as property and the tax you pay on them is considered capital gains tax. However, you can also receive cryptocurrency as an income.
There are two types of capital gains taxes based on the capital gain you have. They include:
- Short-term capital gains. They are realized when you sell cryptocurrencies for more than you bought them and you had held them for less than a year.
- Long-term capital gains. They are realized when you sell cryptocurrencies for more than you bought them and you had held them for more than a year.
Read also: Do you pay taxes on social security?
When Do You Pay Tax on Crypto in the UK?
You pay tax on crypto in the UK in the following case scenarios:
1. Buying and selling crypto. When you sell crypto for more than you bought them, then you are liable to capital gains tax cryptocurrency. If you made a loss, the loss can lower your capital gain tax bill.
2. When you receive payment in crypto. When you receive payment in cryptocurrency, you are liable for income tax regardless of the cryptocurrency you use.
Inherit crypto. HMRC considers crypto as property and when you inherit them, then you are liable for tax.
3. Mining crypto. If you are in the mining business, then you need to pay taxes on crypto gains. However, if you are mining on a small scale, then you are not liable to taxation.
4. Airdrops. If you earn airdrop tokens for doing something, then it is considered income and is liable to income tax. For instance, when you sell your token, it will result in capital gains. However, if you receive airdrops without doing anything, you are not liable to taxation.
5. Interest in cryptos. Crypto savings accounts are becoming popular in the UK. For instance, you earn 7% interest every year when saving with Aqru. Interest earned has to be reported as income and you will need to pay tax for it.
Is Cryptocurrency Taxable in the UK?
Yes. HMRC considers cryptocurrencies as property, hence such holdings are taxable. The UK has a progressive income tax system; your tax liability increases as your income increases. The following are crypto income tax rates in the UK.
|Taxable Income||Personal Tax Band||Tax Rate|
|Up to £12,570||Personal allowance||0%|
|£12,571 – £50,270||Basic rate||20%|
|£50,271 – £150,000||Higher rate||40%|
|£150,000 and above||Additional rate||45%|
How to Not Pay Tax on Cryptocurrency UK
This is how to avoid tax on cryptocurrency UK.
1. Hold Crypto for the Long Term
As long as you are holding crypto and you are not generating an income from them, you are not liable to income tax or capital gains tax. In the end, you may need to sell your cryptocurrencies. Make sure to sell them after a year so that you qualify for a lower long-term capital gains tax rate. It could save you a huge tax bill.
Related: Capital gains tax on shares UK.
2. Buy Crypto in an IRA
You can avoid tax on cryptocurrency UK if you buy them in a self-directed Individual Retirement Account (IRA). Go for a self-directed Roth IRA that allows you to invest in the cryptocurrency of your choice. With traditional IRAs, you can make tax-deductible contributions if you are paying ordinary income taxes for withdrawals after you retire.
3. Sell Cryptocurrencies During Low Income Year
Your income determines your tax rate. If your taxable income is low, your tax rate will also be low. You can sell your cryptocurrencies in the year you anticipate lower income to avoid tax on cryptocurrency UK. When you do so, income from the sale of cryptocurrencies won’t push your income into a higher tax bracket, hence you will pay lower tax.
4. Offset Crypto Profits with Losses
You can avoid capital gains tax on cryptocurrency in the UK by offsetting gains with losses. When you sell cryptocurrencies, you can make a loss or profit. Capital gains and losses can offset each other.
5. Donate to Charity
HRMC considers crypto assets as property. You can avoid paying tax on cryptocurrency UK by giving away property. Cryptocurrency is among properties you donate to charity. However, you must have held them for over a year before donating them.
6. Gift Your Family Cryptocurrency
The other way not to pay tax on cryptocurrency UK is by gifting a family member with cryptocurrencies. Are gifts of cryptocurrency taxable in the UK? When you gift someone with crypto assets, you and the recipient are not liable to pay tax. However, if the recipient sells them, he will be liable for income tax.
Read also: Capital gains tax on property UK.
Summary of Capital Gains Tax on Cryptocurrency UK
HMRC considers cryptocurrencies as property and depending on how you use them, you may be liable to pay tax. For instance, if you sell cryptocurrencies at a profit, you are liable for capital gains tax. But if you hold them without generating an income, you are not liable for taxation. If you have cryptocurrencies, you can take the above measures to avoid capital gains tax on cryptocurrency.