Taxes and Cryptocurrency

As with any disruptive technology, the laws regarding cryptocurrency are playing keep up with the technology itself. Already, grey areas and controversies have arisen over NFTs, insider trading and more. 

From an accountants point of view, cryptocurrency is fairly straightforward. Although there are no specific taxes, your profits will be subject to either Capital Gaines Tax or Income Tax.

Capital Gains Tax

HMRC treats Crypto as a capital asset, and when you dispose of a capital asset you pay a tax on it. In the case of cryptocurrency, disposal might mean any of the following:

  • Selling crypto for GBP or a fiat currency

  • Trading crypto for crypto, including stablecoins

  • Spending crypto on goods and services

  • Gifting crypto unless its to your spouse/civil partner

Something that you might miss is accounting for the transfer fee when moving crypto coins between wallets. If you pay this in a fiat currency then it is tax free. However, many apps will make you pay in crypto, which is taxable.

 

You only pay tax on crypto gains. For decentralised financial transactions (DeFI), they may be subject to Income Tax or Capital Gains Tax depending on the nature of the transaction and whether that transactions has the nature of capital or that of income

Calculating your Capital Gains Tax

To calculate the tax due on your crypto transactions you must figure out your cost basis. This is how much it cost to buy your crypto as well as any transaction fees.

Your capital gain (or loss) is the difference in value from when you acquired the asset to when you disposed of it. In other words, subtract your cost basis from the fair market value of the asset on the day of disposal.

If you have a profit, then you have made a capital gain and must therefore pay tax on the gain as usual. A loss on the other hand might be able to reduce your tax bill

Taxes and Cryptocurrency

As with any disruptive technology, the laws regarding cryptocurrency are playing keep up with the technology itself. Already, grey areas and controversies have arisen over NFTs, insider trading and more. 

From an accountants point of view, cryptocurrency is fairly straightforward. Although there are no specific taxes, your profits will be subject to either Capital Gaines Tax or Income Tax.

Capital Gains Tax

HMRC treats Crypto as a capital asset, and when you dispose of a capital asset you pay a tax on it. In the case of cryptocurrency, disposal might mean any of the following:

  • Selling crypto for GBP or a fiat currency

  • Trading crypto for crypto, including stablecoins

  • Spending crypto on goods and services

  • Gifting crypto unless its to your spouse/civil partner

You do not pay tax on:

  • Buying crypto

  • Holding crypto

  • Transferring crypto 

  • Donating crypto

  • Gifting crypto to your spouse

Something that you might miss is accounting for the transfer fee when moving crypto coins between wallets. If you pay this in a fiat currency then it is tax free. However, many apps will make you pay in crypto, which is taxable.

 

You only pay tax on crypto gains. For decentralised financial transactions (DeFI), they may be subject to Income Tax or Capital Gains Tax depending on the nature of the transaction and whether that transactions has the nature of capital or that of income

Calculating your Capital Gains Tax

To calculate the tax due on your crypto transactions you must figure out your cost basis. This is how much it cost to buy your crypto as well as any transaction fees.

Your capital gain (or loss) is the difference in value from when you acquired the asset to when you disposed of it. In other words, subtract your cost basis from the fair market value of the asset on the day of disposal.

If you have a profit, then you have made a capital gain and must therefore pay tax on the gain as usual. A loss on the other hand might be able to reduce your tax bill

Tax Breaks

Personal Income tax allowance

Your first £12,570 of income in the UK is tax free. In other words, you subtract this amount when calculating what income tax band you're in, unless you earn more than £125,140

Trading and Property Allowance

£1,000 of income from trading or property is tax free. If you get income from both you can get £2,000 tax free

Capital Gains Tax Allowance

You have an allowance of £12,300 and you can use capital losses to stay with this allowance. There is no limit to how large of a loss you can offset against your capital gains, and you may carry forward registered losses to offset future gains.

To register, you must include details of your loss when you submit your self-assessment tax return. For this reason, it might be worth submitting a tax return even if you are not required to do so yet in order to make HMRC aware of any losses you have received.

Income tax

Some crypto transactions are classified as income, and are therefore taxed at your typical income tax band. This includes transactions such as:

  • Getting paid in crypto

  • Staking rewards

  • Mining tokens

  • Ardrops

If your DeFI activities have the nature of income, they'll be subject to income tax. 

How much Tax

​Income tax bands in the UK are the same as for a typical job:

  • Personal Allowance (up to £12570): 0% 

  • Basic Rate (£12571- £50270): 20% 

  • Higher rate (£50271- £150,000): 40% 

  • Additional rate (£150,000+): 45% 

HMRC ability to deal with an individuals cryptocurrency taxes depends on what type of exchange they were using.

Centralised exchanges, such as Binance and Kucoin use a system referred to as KYC - Know Your Customer, which requires an Identify check to find out where you live and who you are, so your trades can be verified to you, similar to stock market trading. 

  

Due to this KYC Identity check, your information will be passed along to HMRC, making them aware of any losses or gains you may have made in the past year. 

  

On the other hand, decentralised exchanges such as Pancake Swap or Uniswap do not require any KYC, and are completely decentralized, often referred to as DeFi, or Decentralised Finance as there is no centralised body. Users engaging with DeFi through private wallets, where only they have access to the keys, are much harder to track down for HMRC and are required to personally make sure they are filing their taxes properly. 

Forks vs Airdrops

A hard fork occurs when there is a permanent split in a blockchain, a split occurs when there is a change to the code. One path has the original blockchain, whilst the other path has the new blockchain. 

This might occur if different factions want to take the cryptocurrency in different directions. The new iteration will be altered slightly with different protocols and adjustments to its code. 

 

An airdrop occurs when a new cryptocurrency token is deposited directly into users’ wallets. If a cryptocurrency forks into two, an airdrop may be used to send the new cryptocurrency straight into their wallets. This might be part of a freebie offering or an ICO purchase.  

It is common therefore, for the holders of a coin to be given a similar volume of the branching off coin. Alternatively, it might be being used to spread recognition. 

Many in the community who have just received these new coins will immediately try and sell them, inevitably causing a surplus in the market and the price of the new coin will drop.  

In this way, an airdrop leads to the generation of a new cryptocurrency that may or may not succeed rather than an iteration of an existing coin.