Crypto assets can be a confusing topic, particularly when it comes to paying tax on them. The UK doesn’t have specific tax rules in place to deal with crypto, so the way that they’re taxed depends on the way they’re used – a bit like any other type of asset.

What are crypto assets?

Crypto assets, also referred to as tokens, cryptocurrencies, or just ‘crypto’, are described by HMRC as “cryptographically secured digital representations of value or contractual rights that can be transferred, stored, and traded electronically”.

In short, it’s a digital way of representing value, ownership, or being entitled to something. Holding the crypto gives you permission to use whatever it is your crypto represents.

How are crypto assets stored and recorded?

Crypto is stored by creating complex code. It’s very, very secure. Crypto assets don’t have a tangible form, so they all live on a type of digital system called Distributed Ledger Technology (DLT).

 
It means that if you change something in the system, it’s changed at all of the other locations too – but the original entry isn’t replaced or removed.

In simple terms, this gives you an audit trail of everything that happens on the ledger, and this audit trail is securely stored in multiple locations at once so it’s much more difficult to tamper with.

Different types of crypto asset

Crypto assets or currencies are often described as tokens. There are different types of crypto token, which do different things.
 

What do different types of crypto token mean for tax?

Not much! The way that crypto assets are taxed depends on the way they’re used, rather than what type of token it is.

Will I need to pay tax on crypto?

The short answer is maybe. The type of tax you might need to pay depends on how and why the crypto transaction takes place.

Before we get into that in more detail, it’s worth mentioning that you won’t normally need to pay tax on crypto transactions if you’re:

• Transferring your crypto between wallets that are both owned by you
• Buying crypto with fiat currency. Fiat currency is a national currency which isn’t tied to the price of another commodity such as gold. For example, Sterling or Euros.
• Gifting your crypto to somebody who is your spouse or civil partner
• Holding your crypto

What kind of tax will I pay on crypto?

Very broadly speaking, there are two possibilities:

• Income tax: Which you pay on earned income such as wages, the profits you make from running a business, or royalties
• Capital Gains Tax (CGT): A type of tax you pay on the gain (profit) you make when disposing of an asset. A disposal can mean you sold it, swapped it for something else, or were compensated for its loss in some way

What makes crypto so complicated is that there are lots of different reasons why a transaction might happen, so this affects which type of tax you pay. We’ll go over some of the most common ones below, but to give you a very general summary of crypto tax according to activity:

• Trading: Capital Gains Tax
• Mining: Income Tax
• Staking: Income Tax

You buy crypto and then sell or swap it (trading)

In most cases, buying crypto and then disposing of it at a later date (aka trading crypto) means you’ll pay Capital Gains Tax on the ‘gain’ you make if it increases in value. In terms of crypto, a disposal might mean you:

• Sold your crypto asset
• Exchanged it for something else of value (including another crypto asset)

The exception to this is what HMRC call ‘the badges of trade’. There is a very long tax manual about this subject, but the short version is that if you’re acting like a business, then you’re a business. If you’re a business, you’ll pay tax like a business would on the profits that it makes so rather than paying Capital Gains Tax. For example, a sole trader would pay income tax instead.

Mining and staking cryptocurrency income

Staking is a bit like gambling in that you ‘stake’ crypto you own, and lock it into a wallet where it can be put to work validating transactions. You can earn additional tokens as a reward.

Mining cryptocurrency is a bit like mining for other resources. Instead of digging valuable materials out of the ground, you expend energy by contributing computing power, and in return you get new coins as a reward.

In both cases you’re basically earning income, so you’ll pay income tax on any profits you make.

You get paid in crypto

If your employer or client pays you with crypto tokens, then you’ll be taxed as if you had been paid with regular money into a bank account:

• By paying income tax and National Insurance if you receive it directly (like a sole trader)
• Corporation Tax if it’s transferred to a limited company

You receive an airdrop

Airdrops are often used as a marketing or advertising tool, and distribute (usually unsolicited) tokens to crypto wallets. If you receive airdropped tokens which aren’t part of a business transaction and you’re not expected to do anything in return, you probably won’t need to pay tax on them.

If you receive an airdrop as payment for a service or other activity, you’ll need to pay tax on it as if it were any other sort of transaction you get through your business. If you dispose of airdropped tokens, you might need to pay Capital Gains Tax on the ‘gain’.

Crypto you inherit

HMRC treats cryptocurrency just like property as far as Inheritance Tax goes.

Someone gifts it to you

Gifting assets can count as a ‘disposal’ for the person who gives them away, which will trigger Capital Gains Tax rules. If that person passes away within 7 years of gifting you the asset though, it might become subject to Inheritance Tax.

What about if I own derivatives over crypto assets?

Derivatives are financial tools which are literally derived or ‘created’ from an underlying asset. They’re a bit confusing because the asset isn’t linked to the derivative in terms of ownership, but they are connected when we talk about how they perform.

 
So, if you have a ‘derivative over crypto’ you don’t own the crypto, you own the derivative of the crypto.

Even though they’re often referred to as cryptocurrency, crypto assets such as derivatives aren’t actually considered to be money or currency – they represent those things. In that respect they’re more like shares in a limited company, so they’re treated in a similar way when it comes to paying tax on them.

The short answer is that you’ll probably pay Capital Gains Tax on any profits you make from crypto derivatives.

How much tax will I pay on crypto?

The amount of tax you need to pay depends on what type of tax you need to pay (so you might need to read the previous sections if you haven’t already). As a basic rule, you’ll pay tax on the amount that’s left over once you deduct any tax allowances and expenses from your income.

I’ve made a loss on my crypto currency. What does this mean for tax?

You only pay tax on the ‘profit’ or ‘gain’ you make, rather than the actual income itself, so you won’t pay tax on any losses from disposing of your crypto. It’s also worth noting you can carry these losses forward and offset them against future gains for up to four years from the end of the tax year they occurred.

How do I report and pay tax on crypto income?

You can complete and submit a Self Assessment tax return to tell HMRC about any crypto earnings. If you only need to tell HMRC about Capital Gains, then you might be able to use the Capital Gains Tax real time service instead. If you operate a limited company which handles crypto, you’ll need to include the details on your Company Tax Return.

What records do I need to keep?

HMRC says crypto investors must declare the following:

• The type of tokens
• ‌Number of tokens you’ve disposed of, and the date you disposed of them
• ‌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

 
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