In the UK, the realm of crypto taxation is both complex and nuanced, with various tax-free allowances playing a key role in how individual investors manage their digital assets. From the annual tax-free allowance on capital gains to specific allowances for inheritance and gifting cryptocurrencies, these regulations can significantly impact an investor's bottom line.
We explore the intricate landscape of tax-free allowances in the UK, specifically tailored to the evolving world of cryptocurrencies. Whether you're a seasoned trader or new to the digital currency space, understanding these allowances can aid in creating a more effective and tax-efficient investment strategy.
This guide is part of our series: UK Crypto Tax
An annual tax-free allowance, also known as a personal allowance or tax-exempt threshold, refers to the amount of income or profit an individual can earn within a specific tax year without having to pay any income tax or other specific taxes, such as Capital Gains Tax (CGT).
This allowance is set by the government and may vary based on factors such as age, marital status, or income level. For the tax year in which the allowance applies, any income or gains up to that threshold are not subject to tax. Amounts exceeding the allowance are then taxed at the relevant rate for that individual, depending on various factors, such as the type of income or the individual's overall income level.
The concept of an annual tax-free allowance is common in many tax systems around the world, and it's intended to reduce the tax burden on lower-income earners. It also serves as an incentive for investment and economic activity in certain areas, such as capital investment in the case of Capital Gains Tax allowances.
In other words: An annual tax-free allowance is like a "free pass" that lets you earn a certain amount of money without having to pay any tax on it.
In the UK, individuals have an annual exempt amount that applies to capital gains, including those from cryptocurrencies. The profit made from buying and selling cryptocurrencies within this allowance (£12,300 for the 2022/23 tax year) is free from Capital Gains Tax (CGT).
Beyond this annual tax-free allowance, gains from cryptocurrencies are subject to CGT. Rates vary between 10% and 20% depending on your total income.
Properly accounting for these gains and leveraging the allowance can result in significant tax savings.
Learn more about Capital Gains Tax for crypto here: Crypto Tax Rates.
There are two types of income tax allowances that are relevant to cryptocurrencies: personal allowance and trading and miscellaneous income allowance.
The personal allowance reduces the amount of income on which you pay tax. For the 2022/2023 tax year, this amount is £12,570. Income above this threshold is taxed at varying rates from 20% to 45% depending on the total income.
Be aware that your personal allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. As HMRC explains, this means your allowance is zero if your income is £125,140 or above.
The UK trading allowance allows individuals to earn up to £1,000 in trading income or miscellaneous income tax-free per tax year. This includes income generated from mining, staking, or airdropds.
Cryptocurrencies are considered part of an estate in the UK, and as such, they may be subject to Inheritance Tax. The current threshold is £325,000; anything below is tax-free, anything above is taxed at 40%.
Be aware that this threshold encompasses the whole estate, potentially including anything from houses, cars, assets like money or cryptocurrency, and any other valuables.
There is no specific gift tax for cryptocurrencies in the UK. Gifting crypto is seen as a disposal and taxed using Capital Gains Tax. The Capital Gains Tax allowance (£12,300 for the 2022/23 tax year) also applies to gifting crypto.
However, gifting crypto to a spouse or civil partner is completely tax-free.
As you’ve just learned, capital gains from crypto transactions may be subject to exemptions within specific allowances. Understanding and leveraging these tax-free allowances can lead to significant savings.
Accurate and thorough record-keeping is vital for tracking crypto transactions. It includes documenting dates, values, and details of transactions. Proper records assist in calculating taxable gains or losses accurately.
Use our free crypto portfolio tracker to automatically track all of your crypto transactions across all wallets, exchanges and blockchains.
Various tools and software can aid in tax optimization for crypto transactions. They help in understanding tax liabilities, exploring opportunities for savings, and ensuring alignment with the legal requirements. Utilizing these tools can simplify the complex task of crypto tax planning.
Blockpit’s very own tax optimization feature highlights actionable tax saving opportunities to help you optimize your trading strategy and save more money!
Blockpit creates the most comprehensive crypto tax reports in PDF format.
Your individual crypto tax 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.
Using Blockpit couldn’t be easier:
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.
Blockpit offers smart insights and suggestions to optimize your tax report, fix issues, add missing values and to validate your transactions.
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.