UK Crypto Tax Guide 2022

Tax season in the United Kingdom begins on April 6 and ends on April 5 of the following year. If you’re submitting a self-assessment, you may be required to pay some bills by July 31. While the dates are simple, U.K. tax advice on cryptocurrency can quickly become complicated.

Her Majesty’s Revenue Service (HMRC), like many other tax jurisdictions, did not enact new legislation to tax crypto assets. Instead, since 2018, HRMC has issued guidance on how to wrap the existing tax code around cryptocurrency. Its guidelines explain how cryptocurrencies are treated as property rather than currency or money.

Since then, the advice has been updated several times, and in March 2021, the HMRC compiled its advice into a manual. The tax department clarified how to report taxes on decentralized finance (DeFi) staking and lending in 2022.

Individuals (rather than businesses) in the United Kingdom are taxed on capital gains and income from cryptocurrency. When you make money from selling cryptocurrency, HMRC will most likely charge you capital gains taxes – just like you do when you make money from stock trading. If you earned cryptocurrency through activities such as working for a decentralized autonomous organization (DAO) or mining, you will be required to pay income tax and national insurance on your profits. If your total income or capital gains for the year are less than certain thresholds, you may be exempt from paying tax. Furthermore, you are not required to pay any taxes for simply holding cryptocurrency.

When do U.K. citizens have to pay tax on crypto?

• Buying and selling cryptocurrency: If you sell your cryptocurrency for more than you paid for it, you’ll almost certainly have to pay capital gains tax on the profit. If you lost money while trading, your capital gains tax bill could be reduced. It is important to note that swapping cryptocurrencies will result in a capital gains taxable event because it involves selling your cryptocurrency to other investors or liquidity pools. In “exceptional circumstances,” such as trading large amounts of cryptocurrency, HMRC will classify you as a trader and require you to pay income tax on trading rather than capital gains taxes.
• When you’re paid in cryptocurrency: You’ll have to pay income tax and national insurance contributions regardless of which cryptocurrency you’re paid in or who pays you.
• Mining and validating: If your mining operation is minor – say, just one computer mining bitcoin in your spare time – HMRC will classify you as a hobbyist who must pay income tax on your profits. If you appear to be running a mining operation, include your mining profits in your trading profits.
• Airdrops: Airdrops are not taxable as income if you receive them without doing anything in return and if you do not receive them as part of a trade or as a result of mining. You must report airdropped tokens as income if you received them as a reward for doing something. When a person sells their tokens, it will almost certainly result in a capital gains taxable event.
• Crypto you inherit: HMRC considers cryptocurrencies to be property under UK tax law.
• DeFi protocols: DeFi taxes can be complicated, and each protocol is unique. If you lend or stake tokens, the HMRC may consider it a capital gains disposal – even if you retain control of the token. Unless you knew the return when you started staking or lending, in which case it’s still revenue. It is income if the DeFi protocol pays you. Other factors, such whether your returns are one-time (probably capital gains) or recurring (income), and whether the loan is long or short term, influence how DeFi is treated under UK tax law.

How much crypto tax do you pay in the U.K.?

If you declare your cryptocurrency earnings as income, they will be taxed at rates ranging from 0% to 45 percent.

You’ll also be required to contribute to national insurance, the United Kingdom’s social security fund. The cost of national insurance varies depending on whether you are employed or self-employed and how much you earn. The rates of taxation range from 2% to 12%.

The first GBP 12,570 of profit from capital gains is tax-free for everyone. If you pay a higher rate of income tax, you’ll have to pay a 20 percent flat fee on any subsequent gains. If you pay a flat-rate income tax, capital gains taxes are calculated based on your earnings. To determine how much you must pay, add your total taxable gains to your tax-free allowance of GBP 12,300. Gains up to the basic income tax bracket will be taxed at 10%, and gains above that will be taxed at 20%.

How to prepare for crypto tax season in the U.K.

• Keep track of all of your wallets and the protocols in which you’ve staked money. When trading, make sure to set aside enough money to cover your tax obligations. When filing your taxes, keep the cryptocurrency’s value in GBP in mind.
• Set up calendar reminders for tax day and give yourself plenty of time to prepare.
• Think about hiring an accountant. Crypto taxes can quickly become complicated, especially for new DeFi protocols, and accountants can assist you in saving money and avoiding fines. Accountancy fees are also considered a business expense if you are a sole proprietor.
• Consider crypto tax software. Among the more popular sites that help you keep track of your crypto taxes are Koinly, TokenTax, and CoinTracker. They assist you in scraping data from exchanges and DeFi protocols, as well as calculating your final tax bill. Accountants cannot be replaced.
• Submit your self-assessment tax return. This should be sent directly to HMRC. You can fill it out yourself online or have your accountant do it for you.

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