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Understanding Crypto Tax Obligations in the UK: A Beginner’s Guide

Learn how to report crypto taxes to HMRC with this comprehensive guide. Understand various tax types in crypto and follow proven steps for filing your crypto tax return.

In the UK, cryptocurrencies are subject to taxation under specific circumstances that mainly fall into two broad categories: Capital Gains Tax (CGT) and income tax. Generally, selling crypto will lead to the payment of capital gains tax, while crypto earnings are usually taxed as income.

Other specific situations are value-added tax and inheritance tax.

  • CGT: Tax on gains from selling crypto assets. It is 10% to 20% of these gains.
  • Income tax: It is charged based on crypto earnings, such as those from providing services or mining. The tax rate is 20-45%.

Other taxes could be value-added tax on goods and services acquired in exchange for crypto or inheritance tax if the estate’s valuation exceeds £325,000.

How Does CGT Work in the UK?

CGT applies to the profit you have made after selling a cryptocurrency. The tax will only apply to net gains — the difference between the selling price and the purchase cost.

Assume that with the sale of Ether, you gained £8,000. Then, deduct the allowance for annual CGT for the tax year 2024/2025, which amounts to £3,000. This now leaves you with a gain of £5,000 being taxable. Based on the 20% CGT rate, you will have to pay a tax of £1,000 on this gain.

CGT Rate and Exemptions:

  • The CGT annual tax exemption for 2024/2025 is £3,000.
  • CGT is progressive, meaning your rate depends on your overall taxable income. The higher the income, the higher the tax rate.

How Does Income Tax Apply to Crypto Income in the UK?

Tax on income from cryptocurrencies is like any other type of income. For example, suppose you receive a cryptocurrency as compensation for providing any service or reward (for instance, mining). In that case, the value is your income, and the authorities charge it to your tax payable.

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For instance, if you are a self-employed web developer and receive £2,000 in Solana (SOL), you will be paying income tax on the SOL even if this amount is part of the £50,000 you earn annually. Since your income is still within the basic rate band, you will pay 20% income tax on the SOL income, which amounts to £400.

VAT on Purchasing Goods/Services with Crypto in the UK

In 2015, the Court of Justice of the European Union concluded that exchanges between crypto and fiat currencies should not be liable to VAT. However, crypto becomes liable to VAT if used to purchase an asset or a service.

For instance, if you use Polkadot to purchase a refrigerator, VAT won’t be calculated based on the cryptocurrency used but on the refrigerator’s value. In the UK, the standard rate for VAT is 20%.

UK Crypto Inheritance Tax Rules

Crypto assets are included in inheritance tax for estates valued over £325,000. The calculation is based on the prevailing value of such crypto at the time of the individual’s death.

Such exemptions or reliefs reduce one’s liability to inheritance tax. The fixed 40% inheritance tax rate may be reduced to 36% if 10% of the estate is given to charity.

How to Report Your Crypto Tax to HMRC

You will report crypto-related income and capital gains on your self-assessment return form, SA100. It should include any gains, losses, or other income from cryptocurrency.

The following are the steps necessary to report your crypto taxes:

  • Calculate Your Crypto Tax: Value your crypto proceeds, sales, losses, and expenses.
  • Join HMRC: You’ll need to register using the Government Gateway service.
  • Declare your crypto income: Declare this on box 17 of the SA100.
  • Declare capital gains: You do this on form SA108; write the crypto proceeds in boxes 14–22.
  • Return deadline: Online filing has to be completed by Jan. 31, 2025.

Calculating Your Crypto Tax in the UK

  • Capital Gains: The selling price, minus the cost of purchase (plus any allowable expenses), provides the profit/loss made.
  • Income: Mining, staking, and other crypto payments will be valued in pounds.
  • Annual CGT Allowance: Deducting the exemption (£3,000) from the overall capital gains would yield the figure upon which the capital gains are found.
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If your assets are in an exchange wallet, use software to track your transactions automatically for accurate records.

Registration with HMRC

You must register if it is your first time filing for taxes.

  • For the self-employed, Sign into your business tax account, add Self-Assessment, and follow the registration process to get your UTR.
  • For non-self-employed: Register using the SA1 form and get your Unique Taxpayer Reference (UTR).

Steps to Report Income in SA100

When you are filling out your SA100 form:

  • Box 17: In this box, report your income from crypto activities.
  • Box 18: Here, include any allowable expenses.
  • Box 21: Add a description of the income source, for example, “Received 200 DOT tokens”.

If you have capital gains, fill out the SA108 form.

Steps to Report Crypto Tax in SA108

In the SA108, report the following as the capital gains from crypto:

  • Box 14: The number of crypto disposals made.
  • Box 15: Total proceeds from crypto disposals.
  • Box 16: Total allowable costs, which includes the cost of purchase.
  • Box 17: Capital gains before any adjustments.
  • Box 18: Capital losses.
  • Boxes 45–47: Carry forward losses or adjustments from earlier years.

Can HMRC trace your Cryptocurrency Transactions?

HMRC can trace your crypto transactions. It has arrangements with exchanges to share your transaction information in detail. Although transactions in cryptocurrency are pseudo-anonymous, they can be traced because the blockchain is a public ledger; therefore, law enforcement and HMRC can trace the identities behind transactions.

Conclusion

While it is impossible to avoid crypto taxes, there are ways to minimize them, like timing gains carefully and staying within the tax-free allowance. This guide has provided detailed information on how to file your crypto tax returns.


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Bradley Nelson

Bradley Nelson is a US based cryptocurrency news writer for Tokenhell, he helps readers stay up to date with the latest trends and news from the blockchain and crypto world. Bradley has been a crypto enthusiast since 2018.

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