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Crypto taxation in the UK

Are you scratching your head about cryptocurrency tax rules in the UK? Wondering how HMRC(How can Her Majesty's Revenue and Customs ) perceives Bitcoin, Ethereum, and other cryptocurrencies? Don't worry, we've got you covered! In our friendly and easy-to-understand UK cryptocurrency tax guide for 2023, we've gathered all the essential information you need.

We'll help you unravel things like cryptocurrency capital gains tax, income tax on cryptocurrency, and how UK cryptocurrency exchanges report to HMRC and the best one when you DO NOT need to pay taxes on crypto

So let's dive in together!

Indeed - cryptocurrency transactions come under the purview of taxation in the UK. According to HMRC, it's evident that your crypto dealings may be liable for both Capital Gains Tax and Income Tax, based on the specifics of the transaction.

  1. Income Tax and National Insurance Contributions: Depending on the activities and the entities involved, income tax could be applied to cryptocurrency activities. If it's part of a business, then it would be subject to income tax. For individuals, it could be subject to capital gains tax. Employees paid in cryptocurrency would need to pay income tax and National Insurance contributions as with any other form of income.
  2. Capital Gains Tax: If a person sells cryptocurrencies, gifts them to someone else (except a spouse or civil partner), trades them for something else, or exchanges them for other types of cryptocurrency, they may have to pay Capital Gains Tax. The taxable gain is generally the difference between the value of what they gave up and the amount they received at the time of the transaction
  3. Crypto assets as Shares: Some types of crypto assets might be seen as shares for tax purposes. The rules are complex, and each case must be considered based on its own individual facts and circumstances.
  4. Record-Keeping: The onus is on the individual to keep detailed records of each crypto asset transaction. This includes the type of asset, the date of the transaction, if they were bought or sold, the number of units, the value of the transaction in pound sterling, the cumulative total, and the costs of the transaction.
  5. VAT (Value Added Tax): As per HMRC, in most cases, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for cryptocurrency. VAT will not be due on the value of the cryptocurrency when it is exchanged.
  6. Inheritance Tax: Cryptoassets will be property for the purposes of Inheritance Tax.
  7. Losses: Individuals need to claim for losses in the tax year they occurred as they can be used to offset other gains.

If your cryptocurrency capital gains exceed the £6000 tax-free allowance, expect to pay a tax rate of either 10% or 20%. Similarly, if your additional income from cryptocurrency transactions crosses the personal allowance threshold, you'll be taxed at a rate between 20% and 45%. The precise tax amount that you owe will depend on the specific details of your transaction, the applicable tax laws, and the Income Tax bracket you belong to.

How can Her Majesty's Revenue and Customs monitor cryptocurrency transactions?!

HMRC collaborates with all UK-based exchanges under a data-sharing program. This allows HMRC access to crypto transaction data, dating back to as early as 2014. Moreover, when you signed up for any UK exchange or wallet, the Know Your Customer (KYC) details you provided are also available to HMRC.

A couple of years ago, HMRC confirmed they partnered with prominent crypto exchanges to share customer data obtained from KYC records. They are utilizing this information to send gentle reminders, known as 'nudge letters', to crypto investors, prompting them to declare their cryptocurrency activities and pay their dues.

To give you an instance, Coinbase, in January 2022, started informing customers holding over £3,000 in crypto that their account information was being shared with HMRC. Fast forward to March 2023, Coinbase began sending out notifications to UK customers who received payments exceeding £5,000 in fiat currency. They were informed that Coinbase had shared details about their account with HMRC, adhering to the requirements of the Finance Act.

That is why keeping meticulous records of your cryptocurrency transactions is essential. First, you need to accurately determine any tax liabilities you may have, and second, to be in compliance with HMRC regulations. Here's a more detailed explanation of what each part of the record-keeping process involves:

  1. Type of Asset: It's important to note whether the transaction involves Bitcoin, Ethereum, or any other type of cryptocurrency. Given the vast number of cryptocurrencies available and their differing values, knowing the specific asset involved is crucial for accurate record-keeping.
  2. Date of Transaction: Recording the date of each transaction is critical because the value of cryptocurrencies can fluctuate significantly from one day to the next. This information will also help you determine if the asset was held for a long or short term, which can affect your tax liabilities.
  3. Bought or Sold: Knowing whether the cryptocurrency was bought or sold is key to determining whether you have incurred a gain or loss on the transaction.
  4. Number of Units: This refers to the quantity of cryptocurrency bought or sold. Keeping track of this allows you to calculate the total value of the transaction and the cost basis for future transactions.
  5. Value of the Transaction in Pound Sterling: It's important to convert the value of the transaction to your local currency (in this case, Pound Sterling) at the time of each transaction. This helps you determine the cost basis for the transaction and any gain or loss when the cryptocurrency is later sold.
  6. Cumulative Total: This refers to the running total of your cryptocurrency holdings. Keeping track of this can help you keep a clear picture of your overall investment in cryptocurrencies.
  7. Costs of the Transaction: This could include any transaction fees or commissions paid to brokers or exchanges. These costs can often be deducted from any gains when calculating tax liabilities.

Do keep all the crypto transaction recordings in a coherent and compiled manner. SMPLR can help you with that. It will be very easy for you to calculate P’n’L and to figure out how much taxes you are obliged to pay.

In summary, keeping detailed records of your crypto transactions isn't just good practice - it's crucial for ensuring you're prepared for any potential tax obligations. The more detailed your records, the easier it will be to calculate your taxes accurately and defend your calculations if HMRC ever requests more information.

Guess what? Not all of your crypto dealings in the UK are subject to tax – there's a silver lining! Here are the instances where you get to give the taxman a miss:

- When you're purchasing crypto with your GBP – it's tax-free!

- If you're a 'HODLer', holding onto your crypto without selling or trading it, no tax applies.

- Moving your crypto between your own wallets? That's tax-free too.

- Feeling generous and donating crypto to a charity? You won’t be taxed for that.

- Plus, here's a little hack: you can gift crypto to your spouse without any tax implications. And the cherry on top? If they haven't used up their capital gains allowance for this year, it could work even more in your favor!

In the next article, we will showcase the tax report made by our partner crypto accountant for his client from the UK. Stay tuned and join our community!