The rising popularity of cryptocurrencies in recent years has led to increased regulatory measures from governments and tax authorities globally. In the UK, crypto tax regulation has become a hot topic among both crypto investors and tax officials.
In recent years, the UK tax authority, HM Revenue & Customs (HMRC), has issued a series of laws guiding the taxation of digital assets. As crypto’s adoption in the UK continues to expand, these regulations have become stricter and more widely enforced.
Understanding this evolving legal infrastructure has become increasingly important for anyone involved in crypto transactions to avoid penalties and compliance issues.
Taxation of Crypto in the UK
HMRC classifies cryptocurrency as a capital asset. As such, when used in transactions that result in a profit made, those profits are considered capital gains.
Transactions in crypto will be subject to one of two taxes, either Capital Gains Tax or Income Tax. Determining which of these tax rates to apply will be based on the nature of an individual's crypto transactions throughout the year.
Before determining which tax rate is applicable, it is necessary to outline the occasions when crypto transactions are not subject to taxes and when they qualify as a taxable event.
Instances when crypto is not subject to taxes:
- Buying crypto with GBP and holding it.
- Transfering crypto between two personal wallets.
- Gifting crypto to a spouse.
- Crypto donations to charity.
Instances crypto transactions are considered taxable events:
- Crypto that is traded for other cryptocurrencies or stablecoins.
- Crypto that is sold for any fiat currency.
- Payments for goods or services in crypto.
- Profits made off of mining crypto.
- Gifts made in crypto to anyone besides a spouse.
- Wages received in crypto.
Capital Gains Tax Versus Income Tax
For the majority of individuals managing a personal crypto portfolio, profits made throughout the year will be classified as capital gains. For Income Tax to be applied on earnings made from trading crypto, an individual will need to be performing transactions at the capacity and sophistication of a day trader.
On the whole, an individual’s profits made from staking crypto and adding or removing funds from a liquidity pool are taxable as Income. Other occasions on which crypto will be taxed as income are if it is earned as a means of compensation for goods or services, or in the case of crypto mining.
Calculating Capital Gains Tax on your Crypto
In the UK, HMRC states that if your capital gains are less than an allotted allowance, you are not required to pay taxes on them. While that allowance had been £12,300 up through the 2022 tax year, beginning in April of 2023 it was cut in half to £6,000, and another cut is scheduled for the 2024/2025 tax year.
If your earnings from crypto exceed the 2023 tax-free allowance of £6,000, you will be required to pay Capital Gains taxes that range from as low as 10% to as high as 20%.
For profits made on crypto that fall within the basic rate tax band of £50,270, gains will be taxed at a rate of 10%. In the case of capital gains exceeding £50,270, an increased rate of 20% is applied.
In regards to crypto that did not generate a profit but instead a loss, the total capital loss can be leveraged to offset what is owed on capital gains. A deduction of the total capital lost from total capital gains represents the final sum of what is owed.
It is important to take this factor into account since it has the potential to represent a 10% difference in taxes owed.
Capital losses can be applied for an indefinite number of years, up until the total capital that was lost has been “spent”. In order to take advantage of this benefit, however, losses must be reported to the HMRC the year that they are incurred.
An example of this feature is as follows: If you lost £10,000 in 2022 and earned £15,000 starting in April of 2023, by deducting the capital losses of 2022 from your 2023 gains, the total taxable earnings becomes £5,000. As a result, your earnings fall within the tax-free allowance of £6,000, making you no longer responsible for paying a 10% Capital Gains Tax.
Paying Income Tax on your Crypto in the UK
Beginning in November of 2022, HMRC created a new series of regulations around staking and lending crypto. These events, along with mining and receiving crypto as a form of payment for goods or services, will be taxable as income.
The Income Tax rates that apply to crypto are the same tax bands as any other form of income. For all wages made on the abovementioned activities involving crypto, taxes can be easily calculated using the following guidelines.
The rate of taxation falls into four specific categories:
- Personal Allowance: Any income that amounts to £12,570 or less is subject to 0% taxation.
- Basic Rate: Income between £12,571 - £50,270 is taxed at a rate of rate of 20%.
- Higher Rate: Income between £50,271 - £150,000 is taxed at a rate of 40%.
- Additional Rate: Income that exceeds £150,000 is taxed at a rate of 45%.
Pay taxes from your crypto mining, staking, and general income using these specifications to avoid compliance issues.
Compliant Crypto Payroll with Rise
As HMRC continues to expand on and develop crypto regulation, it is increasingly important to stay up-to-date on ensuring that your crypto transactions are compliant. This quickly becomes challenging due to the ambiguity with which activities such as staking and lending are defined. Additionally, taxation is strictly enforced in the UK and repercussions of noncompliance are costly.
Introducing Rise, a Web3 enabled compliance and payroll solution built to support traditional companies and web3-native organizations alike. Onboarding with Rise allows companies to streamline their processes of hiring, managing and paying local and international contractors while ensuring total compliance.
Rise not only offers a compliance layer but helps scale payroll with its dual payment infrastructure. This enables flexible pay schedules and automated payments while allowing for efficient routing between fiat and crypto.
To learn more about how Rise can keep your crypto payments in the UK streamlined and compliant, schedule a demo today.