What taxes will I pay on Cryptocurrencies (Crypto)?
In the UK, there are no taxes on purchasing crypto or any taxes during the period that you are hodling crypto. However, there may be taxes when you sell your crypto.
Which tax you will pay will depend on your circumstances;
If you are trading crypto on a regular basis in that you are essentially running a financial trading business, then it is likely that your profits will be taxable under UK Income Taxes. This would be similar to businesses trading in shares and securities and would fall under HMRC guidance BIM56800 - Financial traders.
If on the other hand, you are holding or hodling crypto as a personal investment, then it is likely that you will be liable to pay capital gains tax when you dispose of the crypto.
'Disposal' has been defined by the HMRC as:
- selling crypto assets for money
- exchanging crypto assets for a different type of crypto asset
- using crypto assets to pay for goods or services
- giving away crypto assets to another person
The amount of capital gains will be the difference between the sales proceeds from the disposal and the acquisition cost of the crypto asset. Essentially the sales price less the purchase price.
How much capital gains tax will I pay?
The level of capital gains tax that you will need to pay will depend on the level of the gains made and your income tax bracket:
If your total capital gains in a tax year, is less that the annual exemption (2021/22 – £12,300), then you won’t have any capital gains tax to pay.
If your capital gains exceed the annual exemption, then you will pay capital gains tax on the excess
- For any capital gains income that falls within your basic rate band, you will pay 10% capital gains tax
- For any capital gains that fall into the higher or additional rate bands, your capital gains tax rate will be 20%.
CGT Example
John decides to invest in some IOTA crypto and buys some coins as follows
- 10,000 MIOTA for £3,000 in 2018
- 50,000 MIOTA for £20,000 in 2019
- 40,000 MIOTA for £18,000 in 2020
In total, he has bought 100,000 MIOTA for £41,000 giving him an average price of £0.41 per MIOTA. HMRC uses the average price for your cost of the crypto via a special share pooling method.
He then proceeds to sell 50,000 MIOTA in 2021 for £100,000. His gain would be calculated as follows with the purchase cost being the number sold multiplied by the average purchase price (50,000 MIOTA x £0.41 = £20,500)
Sale Proceeds - £100,000
Less Cost - (£20,500)
Total Gain - £79,500
John would need to report this £79,500 gain on his tax return and would pay Capital Gains Tax at the relevant tax rates. Assuming this is his only gain, he would have his annual exemption to apply against the first £12,300 of the gain.
He would also retain 50,000 MIOTA coins with an average price of £0.41.
One important point to note is that the Same-Day and 30-Day rules that apply to shares also apply to cryptocurrency. This prevents you from selling your Crypto and buying it back within 30 days in an attempt to realise small profits or crystalise losses as way of reducing your tax liability.