by Amelie Arras
April 2023
An information pack to help you fulfil your UK tax obligations
Brits cannot get enough of crypto. A staggering $233 billion changed wallets between June 2021 and 2022, the highest transaction value of any European country and sixth in the world. But this comes with a tax-shaped problem. An estimated 23 million crypto holders owe the HMRC (His Majesty’s Revenue and Customs office)… and it’s possible that many don’t even realise. If you’re one of these people, you could find yourself on the receiving end of taxman letters, bills and penalties of up to 200%.
Here’s what you need to know about crypto and UK tax. Please note that the below does not constitute tax advice – we’ve given some general guidance based on the information available in the HMRC online guides. If you are uncertain of your own tax position, you should consult an accountant or other appropriate tax advisor.
Always keep a record
As you trade your crypto assets, make sure that you keep a record of what you’re doing. This could be something as simple as an Excel Spreadsheet. Be sure to include the price you purchased the crypto for (valued in sterling on the day of the transaction), as well as any ongoing costs, losses and the price you sold it for. Even if you gifted the crypto to somebody else, make sure you have a record. This will be extremely useful for calculating how much tax you owe.
Importantly, by keeping track of your losses, you can also help to off-set returns and pay less tax later.
Tax for crypto investors
Most people who trade in crypto are investors. They’re looking to generate returns and sell it for a profit. If you fall into this category, you may need to pay Capital Gains Tax (CGT).
Capital gains are simply the returns or profits made on an investment. The amount of tax you’ll pay depends on how much you generated.
If you made £12,300 or less across all your investments (including crypto assets), you probably don’t need to pay anything. This is your tax-free allowance. The tax-free allowance can change from year to year, you can find the latest figure on the government website.
In the tax year starting April 2022, if your assets made more than £12,300 (minus any costs), you’ll need to pay CGT on that extra amount.
The CGT allowance is dropping significantly over the next couple of years – from April 2023 it will be £6000 and then is dropping again in April 2024 to £3000 – so another reason to be more vigilant about your record keeping as you’ll have to start paying tax on much smaller amounts over the coming years.
The percentage of tax you need to pay depends on whether you are a basic, higher or additional taxpayer. Most people will likely fall into the Basic rate band, which is 10%. You can find out more about how tax bands work on the government website.
For example:
· If you bought crypto for £5,000 and sold it for £20,000, your capital gains would be £15,000.
· You would pay tax on £2,700 (capital gains of £15,000 – personal allowance of £12,300)
· If you are a basic rate taxpayer, you would pay 10% CGT which comes to £270. (10% of £2,700).
There is an investment vehicle which offers UK investors tax breaks on their savings and investments. This is known as an ISA (Individual Savings Account). There is no UK CGT or income tax liability whatsoever whilst cash and assets remain inside an ISA wrapper, the restriction is that you can only invest up to £20,000 per tax year into an ISA. UK taxes are only applied upon withdrawing funds or assets from an ISA.
But there’s a snag. At the moment, it is not possible to hold cryptocurrencies like Bitcoin directly in a Stocks and Shares ISA. If investors would like to benefit from this tax perk, they could look into ISA providers offering funds which include crypto.
You won’t be charged CGT if you transfer assets to your civil partner or spouse.
Tax for crypto income and salaries
There’s an exciting new trend of employees getting fully or partially paid in crypto. One 2022 study found that 5% of salaries are paid in digital coins, especially for remote workers. While this may be a refreshing opportunity for employees, it can make things a little tricker when it comes to tax.
Income tax is what you pay to HMRC out of your regular income. For most people, this means their salary. Employees will normally get their income tax deducted by their employer before they receive their monthly pay. For crypto, however, you may need to do this yourself, or consider reaching out to an expert accountant.
As you get paid, make sure you keep a record of how much you received in pounds – even if you chose to keep the crypto. This is what you will need to include in your self-assessment. Of course, the amount of pounds will probably vary from month to month.
Adults in the UK have a personal income allowance of £12,570 – this includes all the income you make, across different currencies and jobs. You probably don’t need to pay any income tax if you earn less than £12,570 a year.
If you earn more than £12,570 a year, you will need to pay tax on the extra income. The rate of income tax you’ll pay depends on whether you are a basic, higher or additional rate tax payer.
Here is an overview of each income tax band & tax rate (Source: UK Government):
- Personal Allowance Up to £12,570: 0%
- Basic rate £12,571 to £50,270: 20%
- Higher rate £50,271 to £150,000: 40%
- Additional rate over £150,000: 45%
So, if you made the crypto equivalent of £35,000 a year, here is how you could calculate your income tax:
· £35,000 (your salary) – £12,570 (personal allowance) = £22,430 (taxable amount)
· 20% (basic rate tax payer) of £22,430 = £4,486.00
· The amount of income tax you would need to pay is £4,486.00
Of course, there may be possibilities to expense certain items. Or if you are a freelancer, you may prefer to set up a limited company and pay yourself in dividends. If this sounds like you, you may be able to talk to an accountant for free, depending on where you are based. Check out this link for more information.
Even if you have to pay privately, it could be worthwhile to talk to an accountant about the most tax-efficient way to structure your crypto payments.
How to pay your crypto tax
Organising your taxes is not as daunting as it seems. The best way to get started is by setting up a government gateway account online. You will need to have a few details on hand to do this, including your National Insurance number.
From here, you can find out more about how to record and pay your capital gains or income. Before you get started, here is a useful guide.
Since crypto assets are relatively new, it could be helpful to contact the HMRC to understand more about what you should do in your unique circumstance. For more information on crypto, check out Zumo’s blog.
Frequently asked questions about Crypto tax
When are crypto tax due?
You need to pay tax on the gain you make on crypto, for the financial year 2021/2022, investors should pay their tax by the 31st January 2023 when they file their individual tax returns for the 21/22 tax year.
Listen to the crypto tax podcast
For more information, listen to the podcast Crypto tax doesn’t have to be intimidating with Natalie Dowling from EFI.
