This article has been written for ACCOINTING.com by Sam Inkersole, a manager at BKL chartered accountants and tax advisers. Sam is part of BKL’s crypto tax team, advising people and businesses on the UK taxation of their cryptocurrencies and NFTs.
In the UK, cryptocurrencies which have been earned by individuals are likely to be taxed under the Income Tax rules and may be subject to National Insurance Contributions (NICs). Profits made on the disposal of them are likely to be taxed under the Capital Gains Tax (CGT) rules.
Tax on earnings
Cryptocurrencies are generally earned by an individual when they are received in exchange for services or when they are mined (i.e. a sole trade activity – one which is carried out by an individual with a view to generating a profit).
While rates can differ if charity donations and certain other items are taken into account as a general rule the Income UK Tax rates for the 2021/22 tax year (6 April 2021 to 5 April 2022) are:
- Income of less than £12,570 is within the personal allowance and taxed at 0%
- Income of between £12,570 and £50,000 is taxed at 20%
- Income of between £50,000 and £150,000 is taxed at 40%*
- Income above £150,000 is taxed at 45%
*We note that income between £100,000 and £125,140 is taxed at a higher marginal rate due to the loss of the personal allowance.
Sole trade income is also subject to NICs. The rates for the 2021/22 tax year are:
- Class 2 NIC of £3.05 per week if profits are over £6,515; and,
- Class 4 NIC at 9% on profits between £9,569 and £50,270, and 2% on profits over £50,270
This means that the effective tax rate on the income will be the IT and NIC tax rates combined.
Reporting this income needs to be done under the self-assessment process.
Tax on gains
When an individual transfers one crypto to another crypto, or to fiat currency (i.e. GBP) and the value of the crypto has risen, the gain will be subject to CGT.
It’s worth noting that HMRC believes that the vast majority of those active in the crypto trading market will be taxed under the CGT rules on their crypto trading profits (rather than the Income Tax rules as described above).
As a general rule, gains are taxed at these rates:
- Gains of up to £12,300 are within the annual exemption and taxed at 0%
- Gains of over £12,300 are taxed at 20%
It may be possible for gains totalling between £12,300 and £50,270 to be taxed at a rate of 10% if the individual has not earned any income which has been subject to Income Tax during the tax year.
When calculating the gain, the “base cost” of the crypto needs to be calculated. The base cost is calculated with reference to the “share pooling” rules: this base cost is something which the ACCOINTING.com platform helps you to determine.
If losses are made on cryptos (i.e. their value falls between the time they are purchased and sold) then these losses are treated as capital losses. Capital losses can be used against capital gains made in the same tax year, or they can be carried forward against future gains made in subsequent tax years. This means that they cannot be used to reduce your income or carried back against gains made in earlier tax years.
Reporting these gains needs to be done under the self-assessment process.
Things to think about
If you are earning over £100,000 per year from your crypto mining activities or in exchange for services and you don’t convert the income to GBP and don’t require all the income (after tax) to live on, it may be worth considering “incorporating” your sole trade activity (i.e. transferring it to a company).
This incorporation can be done on a tax-free basis and then profits will be taxed at corporation tax rates (currently at 19% but rising to rates of up to 25% from 1 April 2023), with any profits you take from the company being taxed at dividend tax rates. The effective tax rate paid will be lower than if you were carrying out the activity personally.