A Comprehensive Guide to Crypto Tax and HMRC Rules in the UK

TradersDNA

With cryptocurrency investments becoming more popular, HM Revenue & Customs (HMRC) has specific rules for how crypto assets are taxed. This guide covers the tax implications for UK-based crypto holdings, HMRC’s categorisation of crypto, and compliance requirements.

A Comprehensive Guide to Crypto Tax and HMRC Rules in the UK

1. HMRC’s Classification of Crypto Assets

HMRC does not treat crypto assets as currency; they are instead classified as digital assets, generally subject to capital gains tax (CGT) or income tax. The main categories include:

Cryptocurrencies like Bitcoin and Ethereum are taxable on disposal or when generated as income.
Utility Tokens provide access to products/services and are usually treated like other crypto.
Security Tokens represent ownership or entitlement to future profits.
Stablecoins are pegged to fiat currency and are also taxable under similar crypto tax rules.

2. Types of Tax on Crypto Transactions

In the UK, the main taxes for crypto transactions are Capital Gains Tax (CGT) and Income Tax.

Capital Gains Tax (CGT)

CGT applies when crypto assets are disposed of, which HMRC defines as:

Selling crypto for fiat currency
Exchanging crypto for another crypto asset
Using crypto for purchases
Giving crypto as a gift, except to a spouse or civil partner

For each disposal, gains are calculated based on the difference between the sale price and acquisition cost. The annual CGT allowance for 2024-25 is £6,000, with gains above this taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers.

Income Tax

Income tax applies if you receive crypto from:

Mining or staking
Airdrops (for marketing or participation)
Payment for services

Any crypto received as income is assessed at its GBP market value on receipt. Income tax rates apply based on UK tax bands (20%, 40%, or 45%).

3. New Rules for DeFi and Staking

HMRC has introduced rules for DeFi transactions. Staking income can fall under CGT or income tax, depending on the type, underscoring the need for precise tracking when engaging in DeFi.

4. Crypto Assets Held by Companies

For companies, crypto assets are taxed depending on the business nature and holding purpose. Generally, crypto assets held by a business are treated as chargeable assets subject to corporation tax on gains. Companies may also incur corporation tax if they trade or exchange crypto as part of operations. Specialist Limited Company Accountants can add immense value with dealing with such complexities.

Inventory Classification: If crypto holdings are trading stock (e.g., in an exchange), they may be classified as inventory.
Income from Transactions: If a company receives crypto as payment, it is valued in GBP at receipt, with applicable corporation tax rates.

Detailed records, noting acquisition costs, market value, and fees, are essential for accurate reporting.

5. Record-Keeping and Reporting Obligations

HMRC requires meticulous record-keeping, including:

Transaction dates and amounts (in both crypto and GBP)
Market value at transaction time
Transaction fees or costs
Proof of purchase

Keeping these records aids tax reporting and compliance for HMRC inquiries.

6. Pooling Rules for Calculating Gains

HMRC applies ‘pooling’ rules, where crypto of the same type is combined to form a total pool of assets. Pooling simplifies tax calculations, especially for active traders, by assigning a single average cost per asset. Same-day trades are calculated separately using the ‘same-day rule.’

7. Handling Losses

Losses are common with crypto, and HMRC allows losses to offset gains, reducing tax liability. Losses from crypto asset disposals can be declared and carried forward, provided they’re reported within the same tax year.

8. Inheritance and Crypto Assets

Crypto is part of an estate upon death and may be subject to inheritance tax (IHT) if the estate value exceeds the tax-free threshold. Beneficiaries must report crypto at its market value upon inheritance.

9. Lost or Stolen Crypto

HMRC does not allow deductions for lost or stolen crypto. However, if assets become worthless, a negligible value claim allows investors to declare the loss and offset it against other gains.

10. Tax-Free Transactions

Certain crypto transactions are tax-free, such as:

Gifts to spouses or civil partners
Charitable donations (with specific requirements)
Transfers between personal wallets without changing ownership

These do not trigger CGT, helping reduce tax liabilities.

11. HMRC Compliance and Penalties

HMRC actively monitors crypto activities, working with exchanges to gather customer data. Non-compliance could lead to nudge letters, fines, interest, or other legal consequences.

12. Crypto Tax Reliefs and Allowances

CGT Allowance: The annual allowance of £6,000 exempts gains up to this amount.
Capital Gains Deferral: Reinvesting in schemes like the Enterprise Investment Scheme (EIS) allows for CGT deferral.
Gift Relief: Gifts to spouses are tax-free, and others are generally taxable unless donated to charities.

13. Filing Crypto Taxes with HMRC

Crypto tax should be reported via Self-Assessment by 31 January. Specialist Personal Tax Accountants can assist with ensuring gains and income are accurately reported and documents are organised for potential HMRC review.

14. Using Tools and Resources for Crypto Tax Filing

With evolving rules, particularly around DeFi and staking, staying informed, keeping detailed records, and accurately reporting gains/income can prevent issues. For those handling frequent transactions, tax software tools simplify calculations and help create tax-ready reports.

Conclusion

As HMRC’s focus on crypto tax grows, understanding the regulations, maintaining records, and reporting accurately helps you stay compliant and manage crypto investments efficiently. Consulting a knowledgeable accountant or tax professional can simplify the process and prepare you for the complexities of UK crypto tax.