Navigating the world of cryptocurrency taxes in the UK can be a complex and daunting task.
With evolving regulations and intricate tax laws, understanding how to legally reduce or avoid taxes on your digital assets is essential. This article will explore key strategies and insights to help you minimize your cryptocurrency tax liabilities, all while remaining compliant with UK laws.
Whether you're a seasoned investor or new to the crypto space, these actionable tips will guide you in maximizing your profits and minimizing your tax burdens!
How is crypto taxed in the UK?
In the UK, cryptocurrencies are subject to taxation depending on the nature of the transactions.
Capital Gains Tax (CGT) applies to profits made from selling or exchanging cryptocurrencies, taxing only the profit, not the total sale amount. The rate varies, typically 10% or 20%, based on individual income.
Income Tax is levied on profits from activities like mining or staking, taxing the value of additional coins or assets at the time they are gained. The rate also varies depending on individual income, ranging from 20% to 45%.
Read more about Capital Gains Tax and Income Tax for crypto: UK Crypto Tax Rates
Understanding when and whether CGT or Income Tax applies, and how these types of taxes work is crucial to finding the right strategies to avoid crypto taxes.
Crypto tax: avoiding vs. evading – what’s the difference?
In the realm of cryptocurrency taxes, it's crucial to recognize the stark difference between tax avoidance and tax evasion, as the terms are often mistakenly used interchangeably.
Tax Avoidance refers to the legal utilization of the tax regime to one's advantage to reduce the amount of tax payable by means that are within the law. For instance, investing in tax-advantaged accounts or applying legitimate deductions and credits can reduce your crypto tax liabilities legally.
Tax Evasion is an unlawful practice involving deliberate misrepresentation or concealment of information to reduce tax liabilities. This could include not reporting crypto transactions or falsely claiming deductions.
In summary, tax avoidance involves using legal means to minimize tax obligations, while tax evasion is an illegal act to reduce or eliminate taxes. The distinction is vital as engaging in tax evasion can lead to severe penalties and legal consequences, whereas tax avoidance is a legitimate and often wise financial practice.
Obviously, we will only look at legal ways to reduce your tax liability in this article.
Make sure to read this: How to declare crypto on your HMRC tax return
Crypto Taxable Transactions
Several crypto-related transactions and events are considered taxable in the UK. Here's a small list of common crypto taxable events. Make sure to read our extensive guide UK Crypto Taxes for a complete list including explanations.
- Selling Cryptocurrency: Selling crypto for fiat currency (e.g., GBP) triggers Capital Gains Tax (CGT) on the profit.
- Exchanging Cryptocurrency: Trading one cryptocurrency for another may also incur CGT on any gains.
- Spending Cryptocurrency: Using crypto to purchase goods or services is considered a disposal and may trigger CGT.
- Gifting Cryptocurrency: Gifting crypto to someone other than a spouse or civil partner may also result in CGT.
- Mining Cryptocurrency: Income from mining activities is typically subject to Income Tax. Learn more: Crypto Mining Tax
- Staking Cryptocurrency: Earnings from staking are also considered income and may be subject to Income Tax. Learn more: Crypto Staking Tax
- Receiving Cryptocurrency as Payment: If you receive cryptocurrency as payment for services, it's considered income and may be subject to Income Tax.
- Airdrops: Depending on the circumstances, airdrops may be considered taxable income. Learn more: Crypto Airdrop Tax
- Forks: If you receive new coins from a hard fork, it might create a taxable event. Learn more: Crypto Fork Tax
- Interest from Crypto Lending: Earnings from lending cryptocurrencies may be considered income, leading to Income Tax. Learn more: Crypto Lending Tax
- Cryptocurrency as Earnings: If you are paid in cryptocurrency for your work, this is treated as income and subject to Income Tax.
Is it possible to hide crypto from the HMRC?
HMRC has been taking steps to crack down on tax evasion related to cryptocurrencies. They've been working with various international agencies, obtaining information from cryptocurrency exchanges, and using advanced data analysis to detect discrepancies and hidden assets.
If you're found to have intentionally hidden assets to evade taxes, penalties can be severe. This can include hefty fines, criminal charges, and even imprisonment in extreme cases.
How to avoid tax on cryptocurrency
Using Crypto Tax Software
Crypto tax software can automate the complex task of tracking transactions, gains, and losses across various cryptocurrencies. By providing real-time insights and accurately calculating tax liabilities, it helps in legal tax optimization, ensuring that you claim all entitled deductions and credits, thereby potentially reducing your overall tax bill.
Discover Blockpit’s award-winning Crypto Tax Calculator
Tax Loss Harvesting
This strategic approach involves selling crypto assets that are at a loss to offset gains made on other investments in the same tax year. By doing so, investors can reduce their overall capital gains tax liability. It's a legal and effective way to manage your tax burden, but it requires careful planning and timing to ensure that the losses and gains are properly matched.
Understanding your crypto cost basis is a crucial part of Tax Loss Harvesting. We've written a whole guide about it here: UK Cost Basis Methods
Blockpit’s tax optimization feature highlights opportunities for tax loss harvesting within your crypto portfolio!
Carry Forward of Losses
If in a given tax year, your capital losses exceed your capital gains, you can carry forward this net loss to future tax years. This can be beneficial in offsetting capital gains in subsequent years. It's essential to keep detailed records of these losses, as they can be carried forward indefinitely until they're fully utilized against capital gains. However, they can't be used to offset other types of income.
Learn more about deducting crypto losses from your tax return.
Utilize Allowances
In the UK, the annual tax-free capital gains allowance for the 2022/2023 tax year is £12,5700. By realizing gains up to this limit, investors can legally avoid paying Capital Gains Tax on those gains.
Learn how to use crypto tax-free allowances.
Consider Timing of Sales
Strategic timing of crypto asset sales to align with tax years can significantly impact capital gains tax liability. By planning sales around fiscal periods, one may possibly fall into a lower tax bracket, thus reducing the overall tax rate.
Gift Cryptocurrency
Gifting cryptocurrency to a spouse or civil partner within the UK does not trigger Capital Gains Tax (CGT). This exemption allows for strategic planning within a family's financial framework.
Donate Cryptocurrency
If you donate cryptocurrency to an officially recognized charity without getting anything in return, it may be viewed as tax-deductible. This allows you to deduct the fair market value of your crypto at the donation's time from your taxable income.
Take note, though, that if the value of your crypto has risen since you first acquired it, the donation might still be subject to capital gains tax on the increase in value.
Consider Your Income Bracket
Understanding your specific income level can be crucial in making strategic decisions about selling crypto assets. Since the United Kingdom has a progressive tax system, you may incur capital gains at a lower tax rate by reducing your income and entering a lower tax bracket.
Keep Accurate Records
Maintaining proper documentation and accurate reporting of all crypto transactions is essential in the UK tax system. By meticulously tracking purchases, sales, gains, and losses, you ensure that you're not overpaying on taxes and that you're claiming all entitled deductions.
Use our free crypto portfolio tracker to automatically track your transactions and assets across all wallets, exchanges and blockchains.
Consult a Tax Professional
Engage a tax consultant who specializes in cryptocurrency. Personalized professional advice can reveal opportunities tailored to your specific situation.
Optimize & file your crypto taxes with Blockpit
Blockpit creates the most comprehensive crypto tax reports in PDF format. The report provides information about all your balances and transactions and can be used as proof of origin with banks or tax advisors. It contains all relevant transactions of your account in the selected tax year and shows details such as timestamp, amount, asset, costs and fees of the individual transactions.
Find guidance on tax reporting procedures here: Crypto Tax Forms UK
Using Blockpit couldn’t be easier:
1. Import your transactions
Blockpit offers direct integrations for crypto exchanges, wallets and DeFi protocols. Automatically import your transactions via API integration, wallet address synchronization, or by manually uploading an Excel file.
Discover all crypto integrations
2. Validate & Optimize
Blockpit offers smart insights and suggestions to optimize your tax report, fix issues, add missing values and to validate your transactions.
3. Generate your tax report
Generate your compliant tax report with the click of a button. Our tax engine calculates your tax report on the basis of the UK tax framework.