Compared to most other asset classes, cryptocurrencies are almost brand new. Because of this, Her Majesty’s Revenue and Customs (HMRC) noticed them quickly when they needed tax advice because the total market cap of all cryptocurrencies went over USD 1 trillion.
So you bought cryptocurrency even though taxes are complicated, HMRC sent you a “nudge” letter, and HMRC is sure to come after you for taxes. Congratulations, and welcome to the club of people who don’t like fiat money.
HMRC’s Crypto Stance
They perceive cryptocurrency as an asset, like a stock. Selling or disposing of cryptocurrencies will result in a capital gains event, even if you use them to buy something.
This means the tax regulations for purchasing and selling stocks also apply to cryptocurrencies. They differentiate between trade tokens, utility tokens, and security tokens.
Most cryptocurrencies can be exchanged for value or maintained as investments. Utility tokens can only be utilized within specified frameworks (i.e., football club fan tokens), while security tokens reflect actual world assets or debts.
In conclusion, the amount of tax that you will be required to pay on any particular transaction is determined by two factors: first, whether you are an investor or a trader, and second, whether the transaction in question is regarded as a capital gain or as income that must be reported.
Calculating Capital Gain
HMRC wants people who use cryptocurrency to use a Cost Basis to figure out how much money they made. This can be done by adding up the fair market value of the cryptocurrency you buy and any fees you pay to buy it.
Utilizing your cost basis, you will make a capital gain if you sell for more than this value and a capital loss if you sell for less. Losses in the capital can be used to make up for future gains.
Capital gains only occur when you use your crypto. If you buy HODL, you won’t owe tax on your cryptocurrency even if its value increases (or lowers).
A Guide to Crypto Transactions
Converting your Bitcoin to USDC or vice versa will be seen as a capital gains event, and any loss or gain will need to be included in your net capital gains because HMRC treats stablecoins like USDC the same as every other cryptocurrency.
Whether you got the coins in your capacity or payment for services, an airdrop may or may not be considered taxable income on your tax return.
HMRC explains that income tax will not apply to airdropped tokens in situations where coins were received without the recipient doing anything in return and not as part of a trade or enterprise, including crypto asset exchange tokens or mining.
However, if the tokens are airdropped in exchange for services, then you will have to pay income tax, and the coin’s value at the time of receipt will be considered either gross receipts or miscellaneous income or of the trade or business.
Besides, if the tokens are airdropped in exchange for goods, then the value of the coins at the time of receipt will be considered either gross receipts of the trade or business.
Soft Forks & Hard Forks
HMRC says that neither soft forks nor hard forks are taxable events at the time of the fork. When there is a soft fork, no new coins are made, so the fork is not taxed.
For hard forks, you don’t have to pay income tax on the new coins, but you do have to divide the section 104 costs of the old coins between the old coins and the new coins in a fair way.
After the initial cost allocation, this coin will have its own section 104 pool, and capital gains tax would be applied to any sale.
A capital gains event occurs when you give away some of your cryptocurrencies to another person as a gift. When it comes to accounting for your cryptocurrency holdings at the end of the year, treating a gift as an exchange for cash at the current market price is considered in the same way as selling your cryptocurrency.
If you are the beneficiary of a bitcoin gift, you are only required to pay taxes on any capital gains you make when you trade the cryptocurrency. In this scenario, the value of the gift at the time it was given to you should be used in the calculation of any potential gain or loss related to capital.
Many coins offer staking benefits. Holders of these coins validate transactions and produce new blocks by staking their cryptocurrency. If your holding validates a block, you obtain fresh tokens.
HMRC considers staking returns miscellaneous income’ You must declare the value of the coins when you obtain custody of them as income, as well as any capital gain or loss when you sell, trade, or convert them. You can use your £1,000 tax-free allowance for miscellaneous income to cover staking earnings.
In some cases, staking revenue is viewed as a capital gain. If you know the returns in advance, it’s probably income (even HMRC admits this is complicated). Speculative returns are likely capital gains.
If returns are paid frequently, it’s likely income. However, a lump payment at the contract’s end is likely a capital gain. A staking contract may alter ‘beneficial ownership,’ meaning someone else controls your money while they’re in the contract.
The staker will typically receive a new token. If so, entering and exiting the staking contract will be deemed a capital gains event, and the monetary value of the tokens at the time of deposit and withdrawal must be disclosed.
HMRC explains that just like individuals buying and selling crypto assets, they only expect that individuals will be judged to be carrying on a trade or business in extraordinary situations. This is the case even if individuals can buy and sell crypto assets. How can you identify whether you are engaged in a business or a trade?
In the event that you are engaging in a DeFi trade, the earnings you generate will be subject to taxation according to the applicable business tax regulations. You are required to include, in the calculation of your gross income, the value of any tokens that you get as earnings.
Play To Earn Crypto Games
With the huge growth of crypto gaming, it’s important to know what taxable events are happening when you play. Most of the time, real-world income is taxed as regular income, but sometimes it has to go under the “miscellaneous income tax” section. Unless you play all the time, you probably won’t have to pay any tax.
Tax-Free Crypto Currency Transactions
As a crypto holder, you should know which acts can trigger capital gains tax.
- Gifting crypto to your spouse reduces your capital gains tax liabilities. If your spouse has any of their £12,300 yearly capital gains allowed left, you can transfer crypto to them.
- Moving cryptocurrency between an exchange or private wallets without selling it is not taxable. Keeping track of transfer fees is vital.
- Buying cryptocurrency: You may pay a modest transaction charge when moving fiat cash (GPB) from a bank to a centralized exchange like Kucoin, but you won’t pay any tax.
- Holding your cryptocurrency avoids tax because no assets are sold.
- Cryptocurrency donations are tax-free and do not trigger disposal.
Crypto Taxes Calculation
To figure out how much you owe in cryptocurrency taxes, you should apply these three rules to all of your major transactions. This will give you your total gain or income.
|Taxable Income||Tax Rates|
|£0 to £12,570||0%|
|£12,571 to £50,270||20% (basic rate)|
|£50,271 to £150,000||40% (higher rate)|
|£150,000+||45% (additional rate)|
- Same day: The same day rule says that the cost basis for coins bought and sold on the same day must be from the same day. Rule 2 is for investors who sell more coins or tokens than they brought.
- Going to bed and breakfasts Rule: The “Buy and Sell” (B&B) rule applies to investors who buy and sell the same cryptocurrency within 30 days. All of the coins bought this month are used to figure out the cost basis. As with rule 1, anyone who sells more coins than he or she bought in a month should move on to rule 3.
- 104 Rule: If neither rule 1 nor rule 2 works for you, the next step is to use the 104 rule. The average cost basis is used by the 104 rule. Divide the total amount you spent on coins or tokens by the number of coins or tokens you have.
In the end, no one enjoys paying their taxes, especially on potentially lucrative investments such as cryptocurrencies. However, paying taxes on cryptocurrency profits can be rather lucrative.
However, as bitcoin becomes more widely used in everyday life, it is critical to your financial literacy to understand how and when your cryptocurrencies and other digital assets will be taxed.
This is especially important if cryptocurrency becomes more widely used in the mainstream. In the long term, it is possible that we may receive additional direction on the DeFi space, as well as a more definitive direction from HMRC in the future.