Following Jeremy Hunt’s budget announcement in the spring, crypto assets are set to become a separate category in UK tax returns.
The UK is currently developing its own framework for regulating and taxing crypto and digital assets.
According to the Ministry of Finance’s strategy paper for the spring budget, the new category line will appear on the capital gains pages in tax returns from 2024.
“The government is introducing changes to tax return forms that require amounts related to cryptocurrency assets to be reported separately,” the Treasury said. “The changes will be implemented in tax forms for the 2024-25 tax year.”
Do you have to pay taxes on cryptocurrencies in the UK?
Cryptocurrencies are subject to tax in the UK and HMRC stipulates that crypto assets are subject to both capital gains tax (CGT) and income tax, depending on how they are traded.
For any person living in the UK who sells, trades, spends or gifts cryptocurrency in the UK, it is a taxable event.
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If a person has made a capital gain by selling or trading a digital asset, they must pay taxes on that amount.
This is 10% or 18% for taxpayers who pay the basic tax rate and 20% or 28% for taxpayers who pay the higher or additional tax rate – depending on the amount of profit achieved.
There is an annual capital gains tax allowance which will be reduced from £12,300 to £6,000 from the 2023 tax year, with this set to be reduced to £3,000 in future years.
Reducing the annual allowance could result in thousands more taxpayers being subject to capital gains tax.
Taxable cryptocurrency events
Crypto asset divestments include:
1. Selling cryptocurrencies for British pounds or another fiat currency.
2. Trade crypto for another cryptocurrency, including storing your losses or profits in stablecoins.
3. Spend cryptocurrencies on goods and services.
4. Give cryptocurrencies as a gift to anyone other than your spouse or partner.
Cryptocurrency spending involves transferring crypto asset transactions from one digital wallet to another. Digital wallets are similar to an online bank account and can be set up on crypto exchanges such as Coinbase (COIN) and Binance.
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Crypto assets can also be traded through over-the-counter brokers that enable direct trading between individuals.
This service is particularly vulnerable to abuse by criminals who take advantage of reduced anti-money laundering/know-your-customer (AML/KYC) checks.
Cryptocurrencies can also be traded on decentralized exchanges (Defi), which enable the exchange of digital assets using smart contracts, such as the Ethereum-based Uniswap.
There are no AML/KYC requirements for using decentralized exchanges, which also makes them vulnerable to abuse by criminals.
Tax-free cryptocurrency events
When trading cryptocurrencies, you do not always have to pay taxes, including:
1. Buy crypto with British Pounds (GBPUSD=X).
2. Store cryptocurrency in a digital wallet and do not move or “hodle”.
3. Transferring cryptocurrencies between your own digital wallets.
4. Donate cryptocurrency to a charity.
5. Give your spouse cryptocurrency.
Gary Ashford, vice-president of the Chartered Institute of Taxation, said the move would “help raise people’s awareness of obligations in this area. However, much more needs to be done to address widespread ignorance about cryptocurrency tax payment and reporting obligations.”
“Crypto assets are subject to capital gains tax (CGT) in the same way as any other investment asset, but there are concerns about awareness of compliance obligations, particularly among those who are not professionally represented,” he said.
“Many low-income taxpayers have invested in these assets, but research suggests that barely a third of them are professionally represented or have a good understanding of CGT, almost half have seen no information/guidance on the subject and 84% of crypto asset owners have not sought tax advice.”
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The British government also announced that it plans to introduce new criminal offences for tax evasion and will consult on the issue soon.
“The government will also consider how to speed up the disqualification of directors of companies involved in facilitating tax avoidance, including those who exercise control or influence over a company,” the finance ministry’s budget said.
According to the Financial Services Compensation Scheme (FSCS), investments in crypto assets are currently classified as high-risk.
Watch: The Reasons Why UK Banks Are Blocking Crypto Exchanges | The Crypto Mile
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