Do I need to pay taxes on Bitcoin in the UK?

Ever since cryptocurrencies have become popular as an investment vehicle, governments around the world have been struggling to keep up in their creation of regulations and tax codes. Many Western countries now tax cryptocurrencies like Bitcoin, including the UK, which means that investors that are new to owning them need to maintain a close eye on the nature of their taxation as it develops.

The UK government has instituted taxes on cryptocurrency gains, whether through the buying, selling or mere acquisition of them. Her Majesty’s Revenue and Customs (HRMC) treats cryptocurrency gains as falling into one of two categories for taxation purposes:

• either as income
• or as capital gains.

Cryptocurrency gains are treated as income when such gains are from mining, wages, cryptocurrency interest (Defi), staking or from paid promotions or bonuses like ones attached to new account setups.

When calculating this type of gain, the market value of the cryptocurrency at the time of the acquisition (not at any later point) in pounds sterling is important. Although some gifts of cryptocurrency from one individual to another are not taxed. This value in pounds sterling 

should still be recorded by the original buyer or acquirer so that once they’re gifted, gains can be calculated and taxed accordingly.

Gains categorized as income are taxed at the rate of the receiver’s highest tax bracket, which, after the personal allowance of £12,570 is 20% from there up to £50,270, 40% from there to £150,000 and 45% on all income thereafter for 2021-2022.

Gains from cryptocurrencies are treated as capital gains when they apply to cryptocurrency assets that were owned or bought and then are subsequently sold, spent, swapped or gifted to a non-spouse or non-partner and have increased in market value during the period they were held.

The value at the time of acquisition if bought beforehand is the cost basis (in pounds sterling) of the cryptocurrency. Otherwise, it’s the market value in pounds sterling at the time of acquisition. In the case of crypto assets that have been bought at different points in time and are subsequently sold, it is permissible to average out the costs to form the cost basis by dividing the total paid by the unit of cryptocurrency held.

If gains have occurred during the holding period of the cryptocurrency, these are taxed, but if losses have occurred, the loss is subtracted from the total capital gains that the individual has accumulated in the fiscal year.

Capital gains also have a type of allowance called the “annual exempt amount” which is not taxed. For 2021-2022 it’s £12,300. After this, gains are taxed according to overall income tax brackets: 10% on gains with up to £50,270 of income, 20% on gains when income is above that number.

There are certain rules that keep investors in cryptocurrencies from lowering their tax burden by taking losses via sales in a cryptocurrency and then buying that or another cryptocurrency in the near future. Crypto assets that are sold and then new crypto assets that are bought on the same day or month will have the cost basis of the old sale as the new cost basis of the bought crypt assets. The cost basis is essentially “carried over” from one cryptocurrency to another during these sales and purchases. This is to prevent the “wash sales”, which are basically false exits from the market.

Yet, there are legitimate ways to reduce one’s crypto asset tax burden without running into such restrictions. For one, deductions can be claimed for transaction expenses from the platforms used to purchase crypto assets. Contract costs and possibly even network fees can be deducted. If mining equipment has been purchased and is only being used for cryptocurrency mining, the initial and ongoing costs of the equipment and its upkeep can also be deducted.

Other ways of minimizing one’s crypto asset tax burden legally include gifting crypto to one’s spouse or partner (so that it can fall under their annual exempt amount), placing crypto assets in sheltered accounts like pension funds for retirement or simply waiting to sell crypto assets until a more favourable time.