Do I have to I have pay tax on crypto?

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Cryptocurrency is a digital currency that uses code to verify transactions rather than a central authority like a bank. 

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Chances are you’ll have heard of cryptocurrencies at some point in the last decade. As a reaction to the 2008 banking crisis, the world was introduced to Bitcoin in 2009, a digital currency that acts as a store of value much like gold. Built on an open network called blockchain (a digital list that records every transaction), Bitcoin removed the need for banks and payment processors and allowed any two people to transfer value, free from these institutions’ charges and databases. 

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In the years since, not only has the value of Bitcoin skyrocketed, but tens of thousands of other cryptocurrencies have emerged. Each with their own value, functions and references, and all of them being traded by millions of people each day. 

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With this kind of trading in wealth, HMRC taxes crypto slightly differently. Considered a capital asset and referred to by HMRC as tokens rather than a currency, in most cases you’ll have to pay capital gains tax on profit accumulated through trading crypto. This is similar to profit made from buying stocks. Only if you’re paid in crypto would you have to pay income tax on it. 

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How does tax on crypto work?

Buying crypto with a fiat currency like sterling or dollars isn’t taxed. And holding crypto also isn’t taxed. But ‘disposing’ of crypto, like trading it into cash, means you’ll need to pay tax on the profit.  

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There are a few versions of what HMRC terms disposing, such as: 

• Selling crypto ‘tokens’, either for other tokens or into a fiat currency (capital gains)

• Exchanging tokens for other digital assets, like NFTs (capital gains)

• ‘Mining’ - or minting new tokens (income tax)

• Selling goods or services for tokens (income tax)

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If you’re a limited business then you’ll pay corporation tax on all of these activities.

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As you can see, cryptocurrency isn’t just traded. As the years have gone on there are now a number of roles that involve ‘minting’, ‘mining’ and even deploying apps and programmes on blockchain networks. Often these come from decentralised autonomous organisations (DAOs) who act a bit like a distant client rather than employer. It doesn’t matter who the employer is or what digital currency you’re paid in, you’ll have to pay income tax and make national insurance contributions if you’re earning crypto.

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HMRC does divide earnings into either hobbyist or business categories so if you earn under these figures you won’t pay any tax on your crypto income:

• With capital gains you don’t pay tax on the first £12,300 you receive

• With income tax you don’t pay tax for the first £12,570 you earn

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But bear in mind your crypto earnings are taken into account alongside your income and other ventures so it may well push you into the next band of tax. You can read more about tax bands in our blog post here.

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So you could boil the taxation of crypto profits into:

• Trading = capital gains tax on profit turned (or ‘disposed’) into a fiat currency

• Earning = income tax on disposed crypto profit as part of your total income

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How to pay tax on crypto

Like any other side hustle or self-employed income you’ll either be taxed as a sole trader or a limited company. 

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If you’re a sole trader you’ll need to complete a self-assessment tax return whether it’s capital gains tax or income tax, which you can read more about this in our blog post here.

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When completing a self-assessment tax return for crypto you’ll need to include all of these details:

• The types of crypto tokens you’re disposing of (HMRC ‘pools’ these into different categories e.g Bitcoin, Ether, Litecoin etc)

• The number of tokens you disposed of

• The date that you disposed them

• How many undisposed tokens you have left

• The current value of those tokens in GBP

• Your bank statements and the address (or public key) of your digital wallet

• A record of your costs (either pooled costs or expenses against your profit)

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It’s worth being conscious of how pooling works for HMRC. They pool crypto into different categories in order to simplify the process, and with each pool comes different costs that you can expense. An example of a pooled cost would be the cost of advertising your crypto to a buyer or the transaction fees paid towards the upkeep of the digital ledger (the blockchain). However, if you’ve already claimed expenses against your profit; for example your energy bill while mining bitcoin, then you can’t include these in your pooled costs.

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If you’re a business you’ll pay a corporation tax of 19% on any crypto tokens you dispose of whether it’s paid to you by a client or held as an investment. 

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How can Earnr help?

If you’re a sole trader earning and disposing crypto into GBP you can use Earnr and send us your trades to keep track of your income as you go through the year, meaning that by the time we get to the end of the tax year it’s easy to automate your tax returns with the app. If you would like to learn more, feel free to reach out to us!

👋 Talk to us

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