If you’ve been investing in crypto, you might be wondering whether you need to pay tax on your digital assets. The short answer is yes, however, there are some exceptions to the rule because crypto assets are treated like shares rather than money or currency.
Whether you are brand new to crypto investing or already familiar with how it all works, it’s in your best interest to understand how HMRC taxes different digital assets. Here is everything you need to know about paying tax on your crypto assets.
Capital gains tax and income tax
The main thing to remember is that if you’re selling your digital assets for profit and you go over the allowance, you will need to pay tax. When your gains go over the yearly tax-free allowance, you will need to start paying capital gains tax and HRMC may even consider you a trader and ask you to pay income tax if you trade huge amounts.
If you meet the trading threshold, your net profits will be subject to income tax at 20%, 40% and 45%, depending on what income tax band you fall into. In most cases, individuals will pay capital gains tax on gains exceeding the annual tax-free allowance of £6,000. Basic tax rate bands will be taxed at 10%, while higher rates will be taxed at 20%.
For any traders who are unsure about whether they should be paying tax on their digital assets or the exact amount, it may be worth contacting specialist crypto asset lawyers for professional advice. You don’t want to be at risk of paying any of the associated fines and penalties.
When do you pay tax on digital assets?
You will be taxed on the following activities associated with crypto assets:
- Buying/selling crypto
Whether you’re buying exchange tokens or selling your crypto for more than you originally purchased it, you will likely be charged capital gains tax on these transactions. Even swapping digital assets is a capital gains taxable event as it involves the exchange of shares to another investor.
- Inheriting crypto
You still need to pay tax on any crypto assets you inherit, even if you don’t want them in the first place. HMRC treats inherited digital assets as property under UK law and taxes them accordingly.
- Mining and validating
Whether you’re mining cryptocurrency as a hobby or a business, any profits made may be subject to tax dedications. This will either be as income tax, national insurance contributions or capital gains tax.
- Receiving payment in crypto
It doesn’t matter who is paying you and what format the payment is in, income tax and national insurance are mandatory costs when receiving crypto assets are payment.
