Crypto Assets and taxes on them have become a hot topic due to the hype created by the digital revolution. Many people are asking the question “Is Crypto Subject to Income Tax?” as the government does not accept these crypto assets as money.
To your surprise, HMRC is willing to get a fair share of the ultimate profits and gains made on the Crypto Assets, although Crypto Assets have been claimed to be free from government control. Many people are wondering if they are liable to pay tax on their crypto assets.
In this blog, we will discuss crypto assets and how they are treated by HMRC. Moreover, we will discuss how much tax you have to pay tax on your Crypto assets and what is the requirement for it. So, let’s dive in!
Do you need help on your investment in Crypto assets and how much tax will you pay for the profits you gain over time? Let’s seek help from the professional accountants at Accotax.
What are the Crypto Assets?
Crypto assets are the opposite of fiat money or physical assets with value. These assets exist only digitally without any physical presence. They have virtual value just like Cryptocurrencies and NFTs.
However, these crypto assets can be used to make transactions and buy products online. Following is the list of the crypto assets:
- Cryptocurrency
- Utility Tokens
- Security Tokens
- Non-Fungible Tokens
- Initial Coin Offerings
- Digital and Physical Wallets
- Crypto Funds
The list goes on… You can find as many variations of the crypto assets as you want. Many blockchains provide unique crypto assets to the people interested in the investment of cryptocurrency.
How Is Crypto Subject to Income Tax or Capital Gains Tax (CGT)?
You are liable to pay on your Crypto Assets to inform HMRC about the transactions you make in a tax year to ensure transparency in the financial markets. HMRC wants to know about the money coming into your digital wallets and in your bank accounts as a result of the buying and selling of these crypto assets.
However, HMRC has defined clearly the activities on which you have to pay tax to the government. For example, you must pay tax when:
- You buy cryptocurrency using the normal currency or sell your assets. If this transaction results in a gain or profit, you will pay a CGT.
- If you dispose of your digital assets like cryptocurrency by making a payment as a result of buying products online. This is due to the reason that the digital asset has been swapped for another asset or product. So, CGT will be applicable in this case as well.
- You lend or borrow crypto assets, also known as Decentralised Finance (Defi). The return received on lending or earning rewards will be subject to income tax. So, you will pay income tax after confirming the tax brackets in which you fall instead of a Capital Gains Tax.
- If you are receiving crypto assets freely as a result of a service, known as airdropping, you will pay income tax just like on the miscellaneous income or other income. It will be treated as trading income as well if it confirms the trades of badges described by the HMRC.
- If you receive crypto assets like bitcoins as a gift, the inheritance tax will be considered in this case.
- The income on mining and staking activities will also be taxable either as a miscellaneous or trading income. So, you will pay income tax.
- If your employer is paying you income in cryptocurrency like in bitcoins, you have to pay income tax and the National Insurance Contributions on them through PAYE before they pay you.
How Much Tax Do I Owe to the HMRC on my Crypto Assets?
The income tax and Capital Gains Tax work like a typical income tax and CGT in the case of crypto assets. Digital transformation has evolved the financial systems while bringing in new financial regulations. Nevertheless, there are no separate or distinguished tax rules for crypto assets yet.
Here is the answer to your question “Is Crypto Subject to Income Tax?”
You will not pay income tax if your income is less than the income allowance of £12750. Moreover, you will pay income tax according to the income tax bracket in which your income falls.
For the income tax, the base rate, higher rate and additional rates of 20%, 40% and 45% will be applicable.
Similarly, the Capital Gains Tax will also depend on the number of periods you hold an asset and the profit you make just like a normal transaction in fiat money. So, it is easy to calculate the income tax and CGT on your digital assets. Do remember that you need to distinguish the trading from the digital income you receive.
If your Capital Gain is less than the CGT allowance of £12 300, you won’t pay any tax to the HMRC.
| Type of asset | Basic rate | Higher rate |
| Shares | 10% | 20% |
| Residential property | 18% | 28% |
| Bitcoin/Cryptocurrency | 10% | 20% |
| Other | 10% | 20% |
Conclusion
Crypto assets like bitcoins, Ethereum and NFTs are treated as a normal income or gain. So, you need to calculate the tax you owe to the HMRC simply by following the standard tax rules and regulations. However, you need to differentiate the trading from your income to calculate the right amount of tax. Moreover, you need to maintain a proper record of all your digital transactions to claim back the losses as a result of scams or crashes of your crypto assets.
Accotax strives to keep up with the latest trends in the financial markets and keep its clients up-to-date about Crypto assets and how they can affect your finances. Send us a message or give us a call to get help.
Disclaimer: All the information provided in this article on Is Crypto Subject to Income Tax, including all the tax and graphics is general in nature. It does not intend to disregard any of the professional advice.
