The UK tax laws consider cryptos as assets. So, any crypto transaction attracts income tax or capital gain in the UK. Income tax is charged on profits from mining cryptocurrency or receiving cryptocurrency as payment for goods or services. The income tax you pay will depend on your income tax band and the profit you make.
On the other hand, capital gains tax (CGT) is charged on selling, exchanging, or trading cryptocurrency. The amount of CGT you pay will depend on the amount of gains made.
In this article, we’ll delve into how Income Tax is levied on your crypto income in the UK.
Crypto Income And Personal Tax
HMRC, or His Majesty’s Revenue and Customs, a government body responsible for tax management in the UK, does not consider crypto as real money or currency but rather as property.. Thus, according to HMRC, any profits or earnings made on the purchase or sale of your cryptocurrency assets during crypto trading are considered income and taxable under Income Tax.
Now, transactions made during crypto trading are categorised as income and are taxable under your regular Income Tax band. Moreover, in some cases, you may also be required to pay a National Insurance contribution to the state. The type of crypto transactions liable for income tax in the UK has been explained in the section below.
Crypto Events Taxed As Personal Tax
Certain crypto income is subjected to Income Tax under the following cases in the UK:
- Crypto received as Salary/Income: If you’re getting paid in crypto, i.e., ‘money’s worth’, it is considered income. This means that if you sell your goods or services and receive cryptocurrency as payment in the form of readily convertible assets, you must pay income tax and National Insurance.
- Staking Rewards: As per HMRC, if staking is done as a regular activity, it is classified as income, thereby incurring income tax. Such taxes will be calculated after the deduction of appropriate expenses. Similarly, the pound sterling value (at the time of receipt) of a crypto staking reward not categorised under regular activity will be considered miscellaneous income and, therefore, taxed under Income Tax bands.
- Income from Mining: According to the guidelines of HMRC, the value of the tokens earned from crypto mining activities are charged under Income Tax bands. These token received will be subject to income tax after appropriate expenses are deducted.
- Income from Airdrops: Tokens deposited in an account as a part of a marketing campaign or because you have held a similar token for a longer period are referred to as airdrops. Crypto tax on airdrop is defined as if airdrops are received in return for a service or a product, then such transaction will be subject to income tax as either receipt of an existing trade or miscellaneous income.
Note: As per the HMRC guidelines, you need not pay any tax on cryptos received as airdrops if:
- They are paid without doing anything, i.e., not offering any services or products in return
- They are not received as a part of trading activity related to any cryptocurrency exchanges
DeFi Activities Attracting Personal Tax In The UK
HMRC will likely consider any “returns” via DeFi activities, including receiving new coins or tokens, as additional income. So, you must pay income tax based on the token’s or asset’s fair market value. The DeFi activities likely to be considered as income include:
- Interests received from lending crypto depending upon the nature of the payment.
- Yield Farming rewards earned through DeFi activities. They also depend upon the mode of payment.
- Liquidity pool tokens earned as an interest from lending cryptocurrency. It is affected by the mode of payment of these rewards.
- Rewards earned on play/engage to earn DeFi protocols.
Hence, the most prominent factor that indicates whether the DeFi transaction is classified for income tax or capital gain tax is the ‘nature of income’ for DeFi transactions, i.e., whether crypto is being ‘earned’ or ‘disposed of’.
In the case of earning, you’re obligated to pay Income Tax, whereas in the case of disposal, you’re compelled to pay Capital gains tax.
Applicable Personal Tax Rates
The tax on your crypto income is calculated according to its associated tax rates. You need to learn about the corresponding tax rates to understand the dynamics of calculating your crypto income tax.
As per the HMRC tax laws in the UK, you only have to pay taxes on the amount you earn. The tax rates on your income are divided based on income tax bands. The income tax banding is progressive. This means you don’t have to pay the same income tax rate on all your earnings; instead, you’ll pay a higher tax rate solely if your income comes under higher tax bands.
Notable Income Tax Rates And Thresholds:
The following table displays the UK’s Tax Banding System
Note: The £12,570 personal allowance is not available to taxpayers making more than £125,000 a year, and it is lowered for those making more than £100,000.
How To Calculate Income Tax On Crypto In The UK
Taxable income = FMV(fair market value)
(The earnings could be through – salary, mining, interest, etc.)
Jimmy’s annual income is £40,000. He was paid £10,000 worth of Bitcoin for a project. His total income now is £50,000. His tax liability will be calculated as under.
1st £12,570 – NIL – Personal Tax allowance
Since he falls under the basic rate tax bracket, tax liability on the earnings of £10,000 worth of Bitcoin will be taxable @ 20%.
Tax liability = £2,000.
Overall, if you’re earning through cryptocurrency in the UK, you must pay the taxes levied on it according to HMRC guidelines. A proper understanding of these guidelines is important to comply with the tax laws of the UK and calculate your income tax accurately. But then, manual computation of these taxes can take away a lot of your valuable time and effort.
KoinX is an easy-to-use platform that helps you calculate your crypto taxes in the UK by reducing any complications on your part and simplifying the tax calculation process. Additionally, you can monitor your crypto tax portfolio in a single place. For example, if you have accounts on four different crypto exchanges, you can monitor all of them in a single place in KoinX. This will, in turn, help you to make an informed decision.