Cryptocurrency Tax Payment Guide in UK

Cryptocurrency Tax Payment Guide

Are you new to cryptocurrency? Or a seasoned one? Are you interested to know the prospect of cryptocurrency investment? Whatever it may be, the best course of action is to know about cryptocurrency tax payments before making any move. As the crypto industry is growing in the UK, it makes sense to dig deeper with this guide. Meanwhile, the UK government has recently proposed legislation regarding stablecoins, a prominent type of crypto asset, and has brought it under the scope of local payment regulations. The other popular crypto assets or cryptocurrencies are exchange tokens, utility tokens, and security tokens. At present, the most popular exchange token is bitcoin.

Tax on cryptocurrency

Well, you will be taxed by the HMRC, but before that, you need to know that there exists no cryptocurrency tax, and the tax on your cryptocurrency will be either Capital Gains Tax or Income Tax. Seems confusing? Let’s have a look.

Capital Gains Tax

If you are selling, trading, spending, or gifting crypto, you will have to pay the Capital Gains Tax (CGT). Here, you don’t have to worry as you are required to pay tax only on your Crypto Gains. For example, if you purchased a painting for £2,000 and sold it after some years for £55,000, you will make a total gain of £53,000.

Income Tax

If you are getting paid, staking rewards, or mining tokens, you will have to pay the income tax as then the crypto is perceived as an income. Here, it is vital to note that getting paid in cryptocurrency is also subjected to National Insurance. For example, if you are active in buying and selling huge crypto assets to have some profit, you can be termed as a trader by HMRC and then any amount of money that you have made from crypto will count towards your income tax. If you are a resident of England, Wales or Northern Ireland, this will be between 0% to 45% based on your tax band. However, if you are a resident of Scotland, it will be between 19% to 41%.

Are you needed to pay tax on all your crypto gains?

No, the good thing is that HMRC is quite generous and offers a Capital Gains Tax Allowance to every taxpayer in a tax year. The allowance is £12,300 for the 2021-2022 tax year, and the Capital Gains Tax you have to pay depends on your earnings. You can choose to avoid it by choosing any of the following lawful ways.

Make the most of your losses (if any)

Although strange it may sound but selling some of your assets at a loss may be a gain in a certain tax year when your overall CGT exceeds the annual CGT allowance!

Gift your crypto assets

Another legal way to minimize or avoid the CGT is to transfer your crypto assets to your wife or spouse. This will double the annual CGT allowance for civil partners in an annual year and will be able to save a lot of money!

Buy back the crypto assests

You can buy back the crypto assets from your wife or spouse the very next day or within 30 days. This smart move not only prevents the crypto gains from becoming eligible for the Capital Gains Tax but also retains your crypto assets within the family.

Make a pension contribution

This will reduce the tax on your capital gains from 20% to 10%. Remember, by making a contribution to the pension, you are also extending the upper limit of your income tax band.

Invest in an Enterprise Investment Scheme

An Enterprise Investment Scheme (EIS) is a program run by the UK Government to help small and riskier companies in raising funds to grow their business. Since they are excepted from the Capital Gains Tax for a specified timeline, investing in the same makes a lot of sense.

Invest in the SITR scheme

The Social Investment Tax Relief (SITR) is a scheme introduced by the UK government in 2014 to raise money for supporting the trading activities. Investment in SITR also proves helpful in securing tax-relief if you are following the rules of the scheme for the last three years.

Last but not least, accurate bookkeeping is vital regardless of whether you are a self-employed individual or a crypto investor for tax purposes. Anyway, getting the right kind of financial advice can save you from a lot of hassles(if any). So, hiring a tax advisor can be the best thing to do to remain stress-free.