Income and Gain from Crypto trading
You may have heard that HMRC is sending ‘nudge’ letters to Crypto investors reminding them to report any gains or income on their self-assessment.
HMRC receives reports from exchanges like Coinbase and from banks who must report large sums or unusual activity.
On the whole, HMRC is treating profits from Crypto trading as liable to Capital Gains Tax as it treats it as an asset, not a currency.
The onus on record keeping is with you so, you must regularly download your exchange activities and keep your bank statements and wallet details. Do not rely on coin exchanges to do this for you.
If you need assistance with your compliance and to calculate your tax, please contact us here and our Crypto consultant will contact you.
Q: How much tax will I have to pay?
A: As an individual, you will pay tax at the Capital Gains tax rate on any gains above £12.3K. The tax rate is 10% up to the first £50.2K of your total income and 20% on the remainder.
Q: How are the gains calculated?
A: The gain in each year is calculated on the difference between the amount you disposed of your Crypto and its ‘Cost’. Disposal means selling, swapping, spending, or gifting the Crypto. ‘Cost’ includes purchase price, transaction fees as well as the value of any Crypto you may have received like Airdrop. The ‘Costs’ of Crypto’s are calculated using the average cost method however, where Crypto is bought and sold on the same day or within 30 days there are alternative rules in calculating the ‘cost’.
Q: Are there any tax reliefs?
A: Yes, as a self-employed you can benefit from various allowances; personal allowance, property and trading allowances, and capital gains tax-free allowance. You can also offset capital losses on your Crypto and capital gains.
Q: I have lost my private Crypto key or I have been scammed?
A: In some cases, you may be able to claim for this loss though it is not strictly a capital loss.
Q: I have heard that some Crypto profits are taxed if I haven’t sold anything?
A: Yes, that’s correct, if you receive Crypto such as Airdrops, Mining, rewards, and earnings from DeFi investments, the HMRC class this as income and therefore, it is taxed like earnings. The tax rates on income are 20%, 40%, and 45% depending on your income bands.
Q: How is Crypto derivative trading taxed?
A: The FCA has banned the promotion and sale of unregulated Crypto derivative assets to retail consumers. Derivatives include CFD’s, other margin trading derivative products, spread betting, options, futures, and ETN’s. Generally, private investors will pay capital gains tax on CFD’s and similar margin trading products. Spread betting is considered gambling and therefore, there is no capital gains tax on speculative gains.
Q: How are DeFi transactions taxed?
A: DeFi or Decentralized Finance products are relatively novel but the general rule is that if you are ‘earning’ Crypto, you pay income tax. If you are ‘disposing of’ either through selling, swapping, or spending, you pay capital gains tax. For example, Yield farming or Staking involves deposits into a lending pool to ‘earn’ interest or liquidity tokens. There is no tax if you are simply adjusting your liquidity position.
Q: Do I always pay tax when I acquire or transfer Crypto?
A: You won’t pay tax if, for example, you buy Crypto with your GBP or any fiat currency, gift Crypto to your spouses, transfer between your wallets, give them to a charity, or you buy and hold the Crypto (known as Crypto HODL). However, if you buy new Crypto with an older Crypto, this is treated as a disposal of the older Crypto that is subject to capital gains tax. Stable coins are generally pegged and if your old coin was stable, you may have no gain or loss when buying a newer Crypto.
Q: I am paying transfer fees with my Crypto, can I claim these?
A: No, you cannot. If you transfer your Crypto between wallets and incur transfer fees paid out of your Crypto then this is treated as disposal because you have spent your Crypto.
Q: I move my Crypto into and out of a DeFi liquidity pool?
A: If you are simply moving your asset from one place to another you are not making disposal but if you receive a token, this could be treated as a disposal.
Q: I have received new Crypto from a (hard) fork and earned Airdrops?
A: The fork Crypto you receive is subject to capital gains tax when you dispose of them. The fork’s cost is derived from the existing tokens, not the current value. The Airdrop Cryptos are subject to income tax as treated as earnings and capital gains tax when you dispose of them later.
Q: I am mining for Cryptos, how do I get taxed?
A: If you are Hobbyist, then mined coins will be treated as earnings and you will pay income tax as well capital gains tax when you letter dispose of them. If mining is your business, then any income, and gains, from mining are included in your trading profits.