Crypto has become the new hot for a lot of passive income seekers out there. Since it has its own rules and regulations, there is confusion among the masses regarding its tax implications. Here is how crypto is taxed in the UK tax system.
Is Cryptocurrency Taxable?
Primarily, there are TWO ways to trade crypto —Spot and futures. In spot crypto trading, the value of the asset is increased over time and realized on selling it whereas, in futures, the parties buy or sell the asset ​​at a predetermined future date and price.
That being said, the spot traders make capital gains hence assessed on capital gains tax (CGT), and futures traders on income tax. In addition, an individual can be charged with both income tax and capital gains tax if they have traded crypto throughout the year and have sold a portion or all of the crypto that resulted in capital gains.
Cryptocurrency Tax In the UK
There are no specific crypto tax rates in the UK and general income tax rates —20%, 40% and 45% for basic, higher, and additional rate taxpayers respectively are applicable to crypto traders.
If an individual has no other income stream, the first £12,570 income from crypto can be enjoyed tax-free since it falls in the personal allowance. Additional income up to £50,270 is taxed at 20%, up to £150,000 at 40% and anything over £150,000 is taxed at 45%.
For example, if an individual’s income from cryptocurrency trading in the year is £40,000 and has an employment income of £50,000. The tax calculation will be as follows:
Total Income= £90,000 (40,000+50,000)
Tax:
12,570*0%= 0
37,700*20%= 7,540
39,730*40%= 15,892
Tax Liability= £23,432
Tax on Cryptocurrency Sales
If the individual has sold cryptocurrencies in the year, the gains will be subject to capital gains tax. Capital Gains Tax Allowance is £12,300 which means you can have capital gains of £12,300 tax-free each year.
The capital gains tax rates are 10% for basic and 20% for higher and additional rate taxpayers. Let’s have a look at an example to better understand how we can calculate tax on cryptocurrency sales.
For example, if a basic rate taxpayer makes a £30,000 capital gain from cryptocurrency sales, the capital gains tax implications would be:
Capital Gains= £30,000
Less:
Capital Gains Allowance= (£12,300)
Taxable Gains= £17,700
Since the individual is a basic rate taxpayer, the gains will be taxed at 10%
= £1,770 (17,700*10%)
Additional Keypoint of Selling Cryptocurrencies in the UK
It is noteworthy to mention here that even if your taxable gains fall within the capital gains tax allowance of £12,300, you would still need to inform HMRC if the total amount you sold the asset for was more than 4 times your allowance and you are registered for self-assessment.
