Do YOU need to pay tax on your Bitcoin? Not sure how HMRC operates? This blog uncovers everything you need to know about tax & cryptocurrency.
Cryptocurrency and tax – how do the two interrelate? It’s one of those grey areas that have many investors confused and hesitant when it comes to paying tax for cryptocurrency. We don’t want this to be the case and for this reason, I will go through HMRC’s views on Bitcoin and other cryptos as well as provide a useful breakdown of the current laws in the UK.
The main reason for this confusion is down to the fact that crypto is relatively new, industry-disrupting, and decentralised in nature. As a result, regulation has been slow, to say the least for large parts of the world. For instance, it is particularly unclear in the UK as HMRC tries to distinguish what bracket of tax it should go down as. Unfortunately, instead of being clear, there is a lot of complication from the lawmakers themselves, hence the reason they labelled crypto the “Wild West” back in 2018. Let’s simplify it.
Yes. There is no specific Bitcoin or Crypto tax, instead, it is categorised into Capital Gains Tax and Income Tax. The type of tax you pay is determined by the activity you are engaging within cryptocurrency. For example, if you are earning an income from crypto it will go under Income tax, and if you’re investing your capital, it will be taxed as Capital Gains. This is an important distinction to understand when you come to fill out your Self-Assessment tax return form.
Capital Gains Tax (CGT)
You pay CGT whenever you sell, swap, spend or gift your crypto. More specifically, if you sell your crypto to GBP or any other fiat currency, you will have to pay CGT. Additionally, if you swap your crypto for another crypto or stablecoin, you are subject to CGT. If you spend your crypto on goods and services, you will need to pay CGT. And finally, if you are gifting your crypto to someone, excluding a spouse (explained later), you are subject to CGT.
It is important to remember you only pay tax on the gains (profit) you make. How much CGT you pay varies depending on how much you sell and your income level. Firstly, everyone receives an allowance of up to £12,300 in tax-free profits. This means any profit you make on a crypto investment is completely free until you hit that threshold. After that, you will pay CGT based on your income. Unlike other countries such as the US, there is no short and long-term CGT, just a fixed rate. These rates are 10% if your income is up £50,270; 20% up to £150,000 and more than £150,000.
With crypto, you are subject to the regular Income tax band you normally use. There is a range of different areas in crypto that make you liable to Income tax including getting paid in crypto as well as staking and mining rewards. The current Income tax rates are 0% if your taxable income is up to £12,570; 20% between £12,571-£50,270; 40% between £50,271-£150,000 and 45% > £150,000.
There are certain circumstances in which you won’t have to pay tax at all. The simplest method, of course, is by not selling. If you hold onto your assets, you are not eligible to pay any tax on them. This is where the infamous “hodl” coined its name. In addition, moving crypto from one wallet to another is a tax-free event. This is crucial because your safety and security are paramount and therefore you should never feel uncomfortable about moving your crypto to different wallets for fear of having to pay tax.
And just to reiterate again (because it’s so good), you have a threshold up to £12,300 of profit of which you won’t need to pay a penny in tax. Also tied into tax-free thresholds, it is worth knowing that you are able to gift your crypto to a spouse without paying any tax. However, this is only the case for a spouse and if you gifted your crypto to anyone else, you would be subject to CGT.
So, that is a brief summary of the current crypto tax laws in the UK. Keep an eye out for future blogs where we will revisit some specific areas in more depth.
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