The crypto tax UK rules small businesses need to know

HMRC refers to cryptocurrency units as tokens. It says that disposal is a broad term that includes:

• selling tokens for money
• exchanging tokens for a different type of token
• using tokens to pay for goods or services
• giving away tokens to another person (unless it’s a gift to a spouse or civil partner)

The capital gains tax rates for disposing cryptocurrencies are:

• 20 per cent for higher and additional rate taxpayers
• 10 per cent for basic rate taxpayers (but this depends on your overall taxable income, the size of the gain, and your deducted allowances, as you’ll pay 20 per cent on any amount above the basic tax rate)

The tax-free allowance for capital gains tax is £6,000 for 2022-23 tax year (it was £12,300 for 2021-22).

What is cryptocurrency?

Cryptocurrencies are decentralised digital currencies that don’t rely on banks or central authorities to record transactions and issue new units.

Transactions are recorded through distributed ledger technology (of which blockchain is the best known). This prevents a unit from being used twice and enables data to be shared globally.

The blockchain is distributed across an entire digital network, which anyone can be a part of. As it’s decentralised, no party has overall control over it.

Well-known cryptocurrencies include Bitcoin, Ethereum and Litecoin.

Many people buy and sell cryptocurrency as an investment, which means that HMRC views cryptocurrency as an asset (it doesn’t recognise it as currency or money). You’ll need to pay capital gains tax on the profit you make.

But because the market is new, cryptocurrency tax rules have evolved rapidly.

Is cryptocurrency legal in the UK?

Cryptocurrency is legal in the UK but crypto payments aren’t widely accepted.

The Financial Conduct Authority (FCA) notes the risk that “cryptocurrency is largely unregulated in the UK,” which means any losses aren’t likely to be produced by the Financial Services Compensation Scheme.

However, marketing of crypto has been regulated since 8 October 2023 to help protect investors from scammers.

Crypto tax calculator

If you need to work out how much tax you need to pay HMRC for any income from crypto, use this crypto tax calculator from Tax Scouts. It includes the capital gains tax free allowance and tax you’ll need to pay, and shows any profit after tax you’ve earned.

What is Bitcoin and how does it work?

Bitcoin is a digital currency that you can trade online without the need for banks or other centralised institutions.

Bitcoin is the first digital currency that became widely used. This means that when thinking about cryptocurrencies, Bitcoin will be the first that springs to mind for many. You can trade Bitcoin as an investment, but you can also pay with it at certain retailers.

Bitcoin has been notoriously volatile as an investment. The media has both hyped and slated the cryptocurrency, contributing to its elevation in the public’s consciousness.

Is Bitcoin legal in the UK?

As a cryptocurrency, Bitcoin is completely legal in the UK. Although illegal in some countries, the UK’s approach is to educate and inform potential traders on the risk of cryptocurrency. However, you will need to pay tax on any of your assets.

Working out whether you need to pay cryptocurrency or bitcoin tax

Your gain is usually the difference between how much you paid for an asset and what you sold it for. You pay capital gains tax on your gains above the tax-free allowance.

There are some cryptocurrency-specific ‘allowable costs’ that you can deduct from your gain, including:

• transaction fees paid before the transaction is added to a blockchain
• advertising for a buyer or seller
• drawing up a contract for the transaction
• valuation that helps you work out your gain for that transaction

You can’t deduct costs if you’ve already done so against profits for income tax, or for the cost of mining activities (like equipment or electricity).

It’s also important to get to grips with HMRC’s ‘pooling’ concept. While HMRC says that this ultimately makes it easier to work out what tax on cryptocurrency to pay, it can be a complex topic.

When working out your gain, you group each type of token into a pool, which is also what you need to do for regular investments in a single company.

But you don’t group tokens into pools if you buy them on the same day that you sell tokens of the same type, or within 30 days of selling tokens of the same type.

Find out more about cryptocurrency pooling and capital gains tax in HMRC’s manual.

How to pay tax on cryptocurrency in the UK

You report gains on cryptocurrency on your annual Self Assessment tax return.

You can also use HMRC’s real-time capital gains tax reporting service. Remember that gains are reported in pound sterling.

As usual, it’s important to keep accurate records for your taxes, which includes your cryptocurrency activity too. HMRC says this means the:

• type of tokens
• date you disposed of them
• number of tokens you’ve disposed of
• number of tokens you have left
• value of the tokens in pound sterling
• bank statements and wallet addresses
• records of the pooled costs before and after you disposed of them

If you’re not sure about anything, speak to HMRC or a professional adviser.

How to declare unpaid tax on cryptocurrency

If you’ve realised you’ve not paid tax on crypto assets gained in previous tax years then you’ll need to declare this to HMRC.

You can now make a voluntary declaration to correct your tax account, using a new route launched by HMRC in December 2023.

You may need to pay penalties and interest, depending on why you didn’t inform HMRC of tax owed at the time.

If your gains are from 2021-22 and 2022-23 then this can be done through your Self Assessment (and you can amend this if you’ve submitted it already) up until 31 January 2024.

Crypto tax is particularly complicated, so you may want help from a professional before you disclose anything.

Do I have to pay cryptocurrency tax as part of my business?

The above information is for Self Assessment taxpayers who buy and dispose of cryptocurrency as an individual.

However, some businesses and companies may be carrying out activities involving cryptocurrencies, including:

• buying and selling exchange tokens
• exchanging tokens for other assets (including other types of cryptoassets)
• ‘mining’ (the complex process by which new units enter circulation)
• providing goods or services in return for exchange tokens

If your business does any of these, various taxes may apply, including:

• capital gains tax
• corporation tax
• corporation tax on chargeable gains (CTCG)
• income tax
• National Insurance
• stamp taxes
• VAT

You’ll have to report tax on your Self Assessment tax return or your company tax return.

HMRC’s detailed cryptoassets manual has more on the tax treatment of business activities that involve cryptocurrency.

But as this is a complex topic, it may be best to get professional advice.

Crypto tax software

A quick Google search and you’ll find a host of crypto tax software solutions, but it’s important to be careful with these as the market is still so new and rules can change regularly.

Koinly is one software option that says they keep up to date with HMRC guidelines. You might also have heard of Coin Tracking and Crypto Tax Calculator.

As the taxpayer it’s your responsibility to get your tax return right, so always do thorough research before relying on new crypto tax software. And it’s a good idea to get professional advice to avoid the risk of making mistakes on your tax return.

Cryptocurrency news – get the latest in the UK

As a new, and often unpredictable, investment, it’s important to keep up to date on the latest cryptocurrency news. Websites like Forbes can keep you updated on the latest crypto exchange rates. This can affect when and where you trade, as well as what tax you will owe.

A new measure on its way includes a programme that means crypto platforms will have to start sharing customer information with HMRC from 2027.

Keeping up to date on the latest cryptocurrency news can be helpful when planning future financial decisions. For example, the Bank of England and Treasury are set to make a decision about whether the UK will create its own ‘Britcoin’ digital pound by 2025.

Useful small business guides

• Self Assessment tax resource
• When is the Self Assessment deadline?
• Guide to HMRC penalty points for late submission
• What type of business insurance do I need?

Would you like us to write more about crypto tax or any other cryptocurrency topics? Let us know in the comments below.