Paying UK tax on crypto: key facts for investors

About 20% of UK adults are reported to own cryptocurrency, with almost 45% of them having invested in the past year or two. Buying crypto accelerated during the pandemic, with UK ownership levels now similar to Germany, Ireland and other European countries.

Most UK crypto investors live in London. Research suggests that almost a quarter live in the capital, with 12% living in England’s North West and 11% in both the South of England and East Anglia. The average crypto investor is in their mid-30s and most people buy cryptocurrency as a medium to long-term investment, not as a way to try to make quick returns.

If you’re a recent crypto investor or you’re considering becoming one soon, read on to find out:

• When Capital Gains Tax is payable on crypto.
• When Income Tax is payable on cryptocurrency.
• What cryptocurrency records investors must keep.
• How HMRC can investigate your crypto assets.

When is Capital Gains Tax payable on crypto currency?

In most cases, Capital Gains Tax is payable on cryptocurrency, not Income Tax. Obviously, people invest in cryptocurrency hoping its value as an asset will increase over time. So, like other assets, Capital Gains Tax can be payable if you sell your cryptocurrency tokens, exchange them for other crypto assets, use them to pay for goods or services or give them away (unless you give them to your spouse or partner).

The taxable gain is the difference between how much the cryptocurrency was worth when you bought it and its value on disposal. If your total taxable gains are above the Capital Gains Tax tax-free allowance threshold (£12,300 for the 2022/23 tax year), you’re taxed according to your Income Tax band.

• If you’re a basic rate Income Tax payer (ie with yearly taxable earnings of £12,571-£50,270) you’ll pay Capital Gains Tax of 10% on crypto gains over the CGT allowance.
• Higher or additional rate Income Tax payers (ie with taxable earnings of more than £50,270 a year) pay 20% CGT on their crypto gains, once over the CGT allowance (£12,300).

Need to know! To check if you need to pay Capital Gains Tax, you must calculate your gain for each transaction (the rules are different if you sell crypto tokens within 30 days of buying them).

Crypto CGT allowable expenses

Some crypto expenses can be deducted for Capital Gains Tax. According to HMRC, such allowable expenses include:

• transaction fees paid before the transaction is added to a blockchain
• advertising for a cryptocurrency buyer or seller
• drawing up a crypto transaction contract
• valuations so that you can work out your gain for a transaction.

According to HMRC, deductible allowable expenses can also include “a proportion of the pooled cost of your tokens when working out your gain”.

What about crypto losses and CGT?

You can report losses on cryptocurrency to HMRC to reduce your total taxable gains. When you report these “allowable losses”, they can be deducted from gains made in the same tax year. Unused losses from previous tax years can be carried forward to reduce current or future CGT liability.

You claim your loss via your Self Assessment tax return. You’re not required to report losses straight away; you have up to four years after the end of the tax year within which you disposed of the asset.

Need to know! You report and pay Capital Gains Tax on cryptocurrency by completing a Self Assessment tax return at the end of the tax year or by using HMRC’s real-time Capital Gains Tax service to report it straight away.

When is Income Tax payable on crypto?

• Income Tax and National Insurance contributions (NICs) can be payable on cryptocurrency if gifted to you as a non-cash bonus/benefit/payment by an employer.

• If HMRC believes you’re engaged in cryptocurrency trading rather than simply being an occasional investor, Income Tax rather than Capital Gains Tax may be payable (both via Self Assessment).

• There can also be Stamp Duty, Inheritance Tax and pension contribution implications.

• You don’t pay Capital Gains Tax on the value of the cryptocurrency if you’ve already paid Income Tax, but you will still need to pay CGT on the gain made after you’ve received the asset if you later dispose of it.

What crypto records might HMRC ask for?

HMRC requires you to keep separate records for each cryptocurrency transaction detailing: token type; date of your disposal; number of tokens disposed of; tokens remaining; value of the tokens in pound sterling; bank statements and wallet addresses; pooled costs before and after you disposed of them.

If it decides to carry out a compliance check, HMRC can ask to see your cryptocurrency records. If you don’t disclose cryptocurrency gains to HMRC it may result in you having to pay tax, interest and penalties.

Need to know! If you’re found guilty of deliberately trying to conceal cryptocurrency income/gains you’re guilty of tax evasion, which can lead to criminal charges.

Does HMRC track crypto?

HMRC can make information requests to crypto exchanges. It has powers to collect data from third parties for use in its compliance activities. Cryptocurrency platforms are obliged to share account information with HMRC and they’re open about doing so. If crypto data is held outside the UK, it might still be accessible via international treaties to which the UK is a party.

“KYC” (“Know Your Customer”) is the term given to a financial institution’s obligation to undertake identity and background checks on potential clients before allowing them to use their product or platform. It’s part of a wider set of measures designed to help combat money laundering. The government believes that “hundreds of millions of pounds are likely laundered via over-the-counter crypto brokers”.

Reportedly, HMRC works with large crypto exchanges to share customer information provided from Know Your Customer (KYC) identification records. In recent years, HMRC is reported to have used this information to send “nudge letters” to crypto investors to remind them of their obligation to report their crypto assets and pay their taxes.

Need to know! If you hold cryptocurrency assets, seek professional advice so that you understand your tax position and ensure that you’re reporting cryptocurrency income/gains as required. HMRC remains determined to identify and punish non-compliance.

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