Cryptocurrency is becoming increasingly popular, with more people and businesses investing in digital currencies like Bitcoin and Ethereum. However, as interest in cryptocurrencies grows, so does the need to understand the tax rules that apply. The UK’s tax treatment of cryptocurrency can be tricky, but it’s important to know what taxes you might have to pay when buying, selling, or trading crypto assets.
In this guide, we’ll explain everything you need to know, whether you’re an individual investor or a business.
What is Cryptocurrency?
Cryptocurrency is a type of digital or virtual money that uses cryptography (complex codes) for security. Unlike traditional currencies such as the pound, cryptocurrencies don’t rely on banks or governments to control them. Instead, they are based on a technology called blockchain, which is a system that records all transactions across a network of computers.
Cryptocurrencies are often used for investments, trading, or even as payment for goods and services. Because cryptocurrencies are not controlled by any central authority, many investors see them as an alternative to traditional currencies.
As cryptocurrencies become more widely used, understanding the tax rules is essential. Let’s break down how the UK tax system treats cryptocurrency.
HMRC’s View on Cryptocurrencies
In the UK, HM Revenue & Customs (HMRC) treats cryptocurrencies as property (like an asset) rather than money. This means that when you buy or sell cryptocurrency, it’s similar to buying or selling any other valuable asset, like property or stocks.
This classification has important tax implications. If you make a profit from your cryptocurrency investment, you may need to pay capital gains tax (CGT). This applies to both individuals and businesses who sell or trade crypto for a profit.
Capital Gains Tax (CGT) on Crypto Assets
When you sell or trade cryptocurrency, you may need to pay CGT on any profits you make. Here’s how it works:
- When CGT applies
CGT is triggered when you sell, trade, or dispose of your cryptocurrency. For example, if you sell Bitcoin for pounds, trade one type of cryptocurrency for another, or even use cryptocurrency to buy something, CGT could apply to the profit you made from the sale or trade. - How to calculate your profit
Your profit is the difference between what you paid for the cryptocurrency and what you sold it for. If you sell your crypto for more than you bought it for, the difference is your gain, and you may need to pay CGT on that gain. - Reporting your gains
If you’re an individual, you’ll need to report your crypto transactions on your self assessment tax return. Businesses will also need to include crypto transactions in their accounts and tax returns.
Income Tax and Cryptocurrency
While most cryptocurrency transactions are taxed under CGT, some activities may be taxed as income instead. This usually happens if you’re regularly trading cryptocurrencies or earning cryptocurrency as a business or investment. Here are some examples:
- Mining and staking
If you mine cryptocurrency (using your computer to help verify transactions) or earn rewards through staking (locking up your cryptocurrency to help a network run), the rewards you earn are usually considered income and will be taxed as such. - Business accepting cryptocurrency
If you run a business and accept cryptocurrency as payment for goods or services, the value of the cryptocurrency you receive is considered income and will be taxed as business income.
If you’re trading cryptocurrencies regularly, HMRC may treat your activities as a business, meaning any profits would be subject to income tax instead of CGT.
Keeping Records of Your Crypto Transactions
It’s important to keep accurate records of all your cryptocurrency transactions, as HMRC requires you to report these when you file your tax return. Here’s what you need to track:
- Transaction details
For each cryptocurrency trade or sale, record the date, the type and amount of cryptocurrency involved, the value in pounds at the time of the transaction, and any costs such as transaction fees. - Tracking tools
Software tools are available that can help you track your crypto transactions and convert them into pounds, making it easier to calculate any gains or losses. These tools can make the tax reporting process much simpler.
Not keeping proper records can lead to penalties, so it’s a good idea to stay organised and up-to-date with your transaction details.
Tax Planning Tips
If you’re investing in or running a business involving cryptocurrencies, you’ll want to manage your tax position in the most efficient way possible. Here are some tips:
- Use your CGT allowance
Each year, you can make a certain amount of gains without paying CGT. For the tax year 2024/25, the allowance is £3,000, so if your total gains are under this amount, you won’t have to pay CGT. It’s worth checking if this amount changes in future tax years. - Offsetting losses
If you make a loss when selling cryptocurrency, you can use that loss to reduce the CGT on other gains you make during the same tax year. If you don’t use the loss in the same year, you can carry it forward to offset future gains. - Consider your business structure
If you accept or deal with cryptocurrency in your business, you might benefit from structuring your business in a tax-efficient way. For example, running your business as a limited company may offer advantages over being a sole trader, especially in terms of taxes.
Final Thoughts
Cryptocurrency taxation in the UK might seem complicated at first, but by understanding the basics—like when capital gains tax and income tax apply, how to keep proper records, and how to plan your crypto investments—you can make sure you stay on top of your tax obligations.
Whether you’re an individual investor or a business dealing with cryptocurrency, it’s important to regularly check your tax responsibilities and stay updated with any changes. By keeping everything in order, you can ensure compliance and make the most of your cryptocurrency investments.
How CRM Can Help
At CRM Accountants, we specialise in helping businesses and individuals navigate the complexities of UK tax. Our expert team can guide you through your tax obligations and help ensure your investments are tax-efficient and compliant with HMRC.
Next steps
For personalised support and expert guidance with your finances, you can count on CRM. Fill out our contact form or call us at 01865 379272. We’re here to simplify your financial journey.
