How are Cryptoassets taxed in the UK?
Whilst the world of cryptoassets (“Crypto”) may remain this mystifying, enthralling, or even perhaps alien concept to some, to HMRC it is another way in which they can charge tax on you or your business. In particular, it is an area they are increasingly looking into. With changes in rates, more people are expected to be required to report their Crypto from 6 April 2023.
A guide for Crypto Tax in the UK
Broadly speaking, Crypto will either be taxed through Income Tax or Capital Gains Tax for individuals. It is highly likely that individuals who hold and trade cryptoassets will be subject to Capital Gains Tax over Income Tax. Even if they have a large number of transactions.
In the UK, Crypto is seen as an asset and therefore subject to tax. Therefore, if it is sold, swapped or sent to another individual HMRC will see this as a taxable event. Thus triggering a taxable capital gain or loss. A capital gain or loss may occur when Crypto is:
- Exchanged for a different type of token (e.g. Exchanging Ethereum for Bitcoin or any other kind of cryptoassets)
- Used to pay for goods or services
- Provided to a liquidity pool / staked assets where beneficial ownership is transferred
- Given or gifted away to another person (excluding a spouse or civil partner)
For individuals, net Crypto gains should be reported on a self-assessment tax return. Furthermore, any tax due becomes payable by 31 January following that tax year. So, for any Crypto gains/income that arose in the previous tax year that ended 5 April 2023, any tax owed will be due for payment on 31 January 2024. Crypto subject to Income Tax is usually reportable if exceeding £1,000.
Companies report all of their Crypto gains/income on their corporation tax return. There is no minimum reporting threshold, with tax usually falling due 9 months and a day after the end of the accounting period.
What has changed?
Individuals who are chargeable to Capital Gains Tax on their Crypto activity only need to pay tax on their gains if they exceed their Annual Exemption. For the previous few tax years, this has exempted the first £12,300 of Crypto gains from the capital gains tax. As of 6 April 2023, this has now reduced to £6,000 and will fall even further to £3,000 next year.
Crypto is also reportable regardless of whether a tax charge arises if an individual’s total proceeds (not gains). This applies to all capital transactions that exceed 4 times the Annual Exemption for a particular tax year. The required reporting threshold for your aggregate proceeds from crypto trades might be triggered if they surpass certain amounts:
For companies holding Crypto, the rate of corporation tax that the income and gains are subject to has increased. Previously businesses were taxed 19%, from 1 April 2023 this could be a maximum of 25%.
HMRC changes… The Good, the Bad & the Ugly
With HMRC finally recognising that its current guidance is not reflective of the economic reality of decentralised finance (DeFi) activity. As a result, HMRC is seeking to bring in new laws in the future to remove Capital Gains Tax on disposals arising from DeFi activities where the economic interest in the token is retained throughout.
This means that Capital Gains Tax would only arise when the Crypto tokens are economically disposed of in a non-DeFi transaction (such as a sale for fiat, a swap/exchange for another crypto token or where a token is used as payments for goods/services). This relief from Capital Gains Tax is intended to cover DeFi transactions. Specifically, where the user retains the economic interest in the tokens locked away.
Unfortunately, HMRC implies that liquidity pool activity will be excluded from this tax relief. This is because they would argue that the user does not retain the full economic interest over the tokens added to the pool.
Furthermore, the government is also considering giving HMRC more powers. This could be used to recover unpaid taxes on Crypto transactions directly from digital wallets. HMRC currently has the power to recover established debts directly from debtors’ bank accounts. As a result, proposals are being considered to extend this power and allow HMRC to recover amounts from digital wallets. From the tax year ended 5 April 2026, HMRC will also be asking taxpayers to report their Crypto income and gains in a new dedicated part of their self-assessment tax return. This indicates that HMRC is becoming increasingly interested in making sure taxpayers are reporting their Crypto transactions.
Help from Carpenter Box
At Carpenter Box, we understand that tax reporting for Crypto can be complicated and confusing. This is why we have a dedicated specialist team who can help you record and advise on the tax implications of Crypto. We advise and provide support to people and businesses who trade Crypto coins and assets undertake DeFi transactions, produce their own NFTs, Cryptoassets or Crypto tokens/exchanges, and even create games in the metaverse.
Please do not hesitate to contact a member of our team if you are looking for support on Crypto.
Find out more
If you have a lot of NFT or cryptoasset transactions, it might be advisable to make use of UK tax-compliant crypto asset-tracking software to record your gains.
If you need professional advice in connection with NFTs or a cryptocurrency asset, please get in touch with one of our team.