Crypto and Tax How HMRC Treats Crypto Currency Gains

In the last few years, you may have heard more about cryptocurrency. Actually, a lot of people in the UK, as well as across the world, have invested in cryptocurrencies. The motive is to make profits, but when profits are there, there will be some taxes too. So, let’s know how HMRC treats cryptocurrency gains.
Remember, if you have also invested in Bitcoin, Ethereum or other cryptocurrencies, you must know about these taxes. However, before that, know that HMRC does not recognize these cryptocurrencies as money. According to them, it is an asset type.

Capital Gains Tax on Crypto

Suppose you chose to buy and sell cryptocurrency for some investment purpose. In such a case, HMRC will recognize it as a capital asset. So, if you sell your cryptocurrencies and make some profit, it will be recognized as capital gains, and you need to pay Capital Gains Tax (CGT). However, you may also have to pay CGT when you exchange one cryptocurrency for another, use it to buy some goods or services, or gift crypto to someone. Remember that someone should not be your spouse or civil partner. The tax will be applied only to the profit. Currently, the tax-free allowance for capital gains is £3,000 for 2024-2025. So, if your total gains in a tax year exceed this allowance, report and pay tax on the excess.

Income Tax on Crypto

If you are regularly trading cryptocurrencies or earning them as a salary, your earnings may be subject to Income Tax and National Insurance rather than CGT. You may need to pay Income Tax if you:

• Receive crypto as a payment for work.
• Earn crypto through mining or staking.
• Receive airdrops that are not freely given.
• Engage in frequent trading, resembling a business.

HMRC will look at various factors. One of these factors is trading volume to understand whether your activities should be classified as an investment or trading.

How Much Tax Will You Pay?

If income tax is applicable, its rate will depend on your total taxable income, including your crypto gains. There are three different income tax rates. These are as follows:

• A basic rate of 20%
• A higher rate of 40%
• An additional rate of 45%

Similarly, if capital gains tax is applicable, these are the rates:

• 10% for basic rate taxpayers
• 20% for higher and additional rate taxpayers

So, now that you have a fair idea of how HMRC treats cryptocurrency gains, keep records of all your crypto transactions. This must include dates, amounts, and their market value at the time of each transaction. Don’t forget to report any gains or losses from cryptocurrencies by filling out the self-assessment tax return.

Hire a skilled accountant from a reputed UK accountancy firm to reduce your tax liabilities. To avoid being classified as a trader, do not indulge in excessive trading of your cryptocurrencies.  After all, HMRC is now tracking crypto transactions. So, if you do not report your crypto gains or losses to the HMRC, there may be unwanted penalties and interest charges.