Tax & admin · 6 April 2022

Do You Pay Tax On Crypto Gains?

Do You Pay Tax On Crypto Gains

Do you pay tax on crypto gains in the UK? This is a question that is asked a lot. Cryptocurrencies are becoming more and more popular, and with their increasing value, comes the need to pay taxes on any profits made. While many crypto traders may not realise it, it is a legal requirement in the UK to declare crypto gains and pay taxes on profits over £12,300.

But how do you go about paying these taxes? And are there any ways to reduce your tax burden?

In this article, we will answer these questions and more to make sure you are up to scratch with all the relevant crypto tax regulations.

What Kind of Tax Needs to be Paid on Crypto Gains?

In the UK, any profits you make from trading cryptocurrencies are subject to Capital Gains Tax (CGT). This is a tax on the profit you make when you sell or dispose of assets such as property, shares or, in this case, cryptocurrencies.

You become liable for CGT once your total taxable gains for the year exceed the £12,300 annual exemption limit. If this is your only source of income, you will pay tax at the basic rate of 10% on any profits above the threshold. Higher-rate taxpayers will pay 20% and then incrementally higher rates depending on the current UK tax brackets.

What is Cryptocurrency Disposal?

HMRC defines cryptocurrency disposal as “any activity that results in the transfer of cryptocurrency to another person or organisation”. This could include selling, gifting, transferring or exchanging your crypto.

It is important to note that you are liable for CGT on the profit you make from each individual disposal, not on the total amount of crypto you hold. So, if you bought one bitcoin for £12,000 and it is now worth £24,000, you would only pay CGT on the £12,000 profit if you sold the entire coin.

If you only sold half of the coin, you would pay CGT 50% of the profits. This is why many crypto traders choose to “sell” their cryptocurrency by exchanging it for another type of crypto, rather than cash. By doing this, they can defer or even avoid paying CGT on their profits.

However, it is important to note that HMRC does have the power to treat crypto-to-crypto exchanges as disposals, so it is always best to declare your profits and pay any tax due if you are worried about potential penalties.

tax deductibles for crypto

What Can You Deduct from Taxable Gains?

There are a few allowable costs that you can deduct from your taxable gains to reduce the amount of tax you owe. These include:

  • Transaction fees – The fees you pay to buy or sell crypto on an exchange.
  • Advertising costs – If you promote your crypto business with online ads, these costs can be deducted from your taxable gains.
  • Contract fees – Any professional fees you incur in relation to your crypto trading activities, such as legal or accounting fees.
  • Valuation costs – If you need to have your crypto assets valued for tax purposes, these costs can be deducted.

How Does “Pooling” Work with Crypto Gains?

HMRC uses a system of “pooling” to calculate CGT on crypto assets. This means that all of your cryptocurrency disposals in a tax year are added together and treated as one asset for CGT purposes.

The pooling system is designed to simplify the tax treatment of crypto assets, but it can also result in a higher tax bill if you have made a lot of small disposals over the course of the year.

How to Work Out What You Owe

To calculate your CGT liability, you first need to work out your total gains for the year. This is done by adding up the pound sterling value of all your cryptocurrency disposals and subtracting the cost of those assets (what you paid for them plus any allowable costs).

You then need to apply the relevant CGT rate to your total gains to calculate your tax bill. As noted above, the CGT rate will depend on your marginal tax rate.

If you are a higher or additional rate taxpayer, you will also need to calculate your “annual exempt amount”. This is the amount of money you can earn in a year before you start paying tax at those rates.

How Do You Pay Taxes on Crypto Gains?

If you are liable for CGT, you will need to pay it to HMRC. This can be done via their Self-Assessment tax return system.

You will need to declare your crypto gains on your tax return and pay any tax due by the 31st of January following the end of the tax year in which you made the disposal. So, if you sold crypto in the 2021/2022 tax year, you would need to declare your gains and pay any tax due by 31st January 2023.

It is very important that you file accurate returns before the due date or you may be subject to penalties.

What if you Live Outside the UK?