UK Crypto Tax

Although the UK did not create an adequate regulatory framework with regard to cryptography, Her Majesty Revenue has already issued the Cryptoassets Manual, where all tax obligations related to cryptography are explained under the existing legislation. If you are trying to understand how your crypto activities can be taxed in the UK, the most important thing to remember is the main principle: HMRC taxes cryptoassets based on what they are used for.

This guidance is based on two policy documents: Cryptoassets: Personal Tax, published in December 2018, and Cryptoassets: Business Tax, published in November 2019. According to these papers, cryptoassets commonly referred to as tokens or cryptocurrency – are digital representations of value or contractual rights that are crypto secured and can be electronically transferred, stored, or sold.

The main types of taxable cryptos are:

• Token exchange – used to pay and invest
• Utility tokens: those existing within a certain DLT ecosystem, where their holder can swap them for a certain good or service and trade, but not outside of it;
• Security tokens: those granting specific rights or interests in enterprise, such as ownership, return of a certain sum of money, or a right to a share in future profits.
• Stablecoins: these are pegged to something that is perceived to have stable value – for example, fiat money or precious metals. They are therefore less volatile.

All serious crypto companies have to observe existing deadlines and deadlines, like a tax year that starts on April 6 and goes to April 5 of the next year. Every year, a tax depends on the persons who take part in processes, connected with the character of their activity, and such a criterion as income, profit, and expenses.

Depending on their legal form of business organization, the cryptoasset businesses may be liable, inter alia, for the following taxes:

• CT – 19%
• DST – 2%
• NIC – rates vary depending on the earnings of the employee
• VAT – 20%
• SD – 0.5%

When the clarification of the tax treatment is being made, the Cryptoassets Manual primarily deals with the businesses that are carrying on activities concerning exchange tokens, for example, Bitcoin. Examples of activities include:

• Purchasing and selling exchange tokens
• Converting tokens into other forms of assets including other forms of cryptoassets
• Crypto mining
• Provisions of supplies or services in return for the exchange tokens

Corporation Tax

The corporate tax is calculated on the basis of profit and gain of the company. For it to correctly calculate the tax, just like any other asset, each transaction involving the exchange of tokens that has taken place must be registered.

Crypto asset is not treated as a currency or money and is thus taxed akin to conventional assets. Besides, it implies that the subsequent money-related corporate tax legislations are irrelevant for crypto assets, including the exchange tokens too, such as:

• Currency rules
• Ignore exchange gains and losses
• Fixed currency election

If the activity related to the exchange of tokens is not a trade and is not within the charge to corporation tax in any other way, then the disposal of a capital asset and any gain is, in principle, chargeable as a profit liable to tax. Transfers of tokens within public addresses (wallets) which the company controls and for which it has the profits are not considered to be a disposal.

Exchange tokens are chargeable assets for a corporation tax in case they can be property and have a value that can be realised. Profits or losses from the management of currency markers has to be calculated first in order to find out if a crypto company is bound to pay tax to the corporation based on its taxable assets.

All gains are to be declared to HMRC in the course of the company filing its tax return. Also, much like any business, every crypto company may declare the discounts and bas-reliefs that would impact the last value of the corporation tax.

The following business costs are deductible:

• The amount originally paid for the asset
• Transaction fees paid for the transaction to be recorded on the distributed ledger
• Advertisements for a buyer or a seller
• Professional fees paid to draft a contract for the purchase or sale of the tokens
• Costs incurred to create a valuation or apportionment to enable a gain or loss to be determined

Digital Services Tax

Digital Services Tax is payable on the revenues that are sourced from the UK users of certain digital activities. One of the three digital services activities defined for the purposes of the Digital Service Tax is an online marketplace for selling products or services. For this reason, a crypto exchange would fall within that definition and would thus be subject to this tax.

The Digital Service Tax Manual, the component of an online marketplace definition is constituted by the following:

• The service allows users to advertise and/or sell some products or services to other users
• The central or one of the central purposes of the service is to enable users to sell products or services

The sale need not necessarily be consummated on or through the exchange. The exchange can just facilitate advertising or enable the sale to take place.

An exemption from the definition of online marketplace applies where more than a half of the marketplace revenue for the financial year arises in connection with the facilitation of the trading of financial instruments, commodities or foreign exchange. Given that crypto assets are none of these things, crypto asset businesses are unlikely to be exempt from the tax.

Value Added Tax

Any goods or services supplied as consideration for tokens are subject to VAT in the usual way. The taxable value of the services or goods supplied is the pound sterling value of the exchange tokens at the time of the supply. However, if cryptocurrencies are supplied in exchange for goods and services, the supply of the cryptocurrency itself will be exempt from VAT.

The cryptocurrencies received by miners in return for their token-exchange activities usually are not within the scope of VAT, because the activity does not constitute an economic activity for VAT purposes due to insufficient link between any provided services, and because of lack of customers for mining.

Fees charged over and above the value of the exchange tokens for any transaction in return for the token are outside the scope of VAT, provided the service provider is qualified as an intermediary.

The supply of any services necessary to exchange tokens for fiat money or other exchange tokens and vice versa are outside the scope of VAT.

Venture Capital Schemes

Crypto-asset businesses can apply for tax-advantaged investment status under the venture capital schemes, where they meet the requisite conditions, particular to each scheme, such as the investor and the proposed investment. Currently, crypto-specific conditions are laid down, which in any case would treat all crypto asset companies as any other business.

The key qualifying condition of the venture capital schemes is that the substantive trade of a company must be a qualifying trade that must be carried on a commercial basis with a view to the realisation of profits and which isn’t an excluded activity. Companies wanting an opinion on whether they qualify can ask HMRC via the advance assurance service.

How can I pay taxes in crypto in the UK in 2024?

This paper highlights that, even in 2024, the tax treatment of cryptocurrencies in the UK is still an evolving issue, as the UK strives for a reasonable and appropriate system within this new class of digital assets. The British taxation department, HM Revenue & Customs (HMRC), clarifies that, from a taxation point of view, cryptocurrencies are not to be treated as currency but rather as personal property. To properly explain that, one would have to know the key features of such rules.

Categories of Taxation

Cryptocurrency income generated in the UK can be subject to one or several kinds of taxation, depending on the nature of the activity arising from that income, which may include the following:

Capital Gains: These are usually chargeable under CGT. There is a history of the exchange of one cryptocurrency for another being subjected to CGT, and this also extends to using cryptocurrency to buy goods and services.

Income Tax: Income from mining, trading as a business, or getting remuneration in cryptocurrency will be subject to Income Tax.

Taxation Highlights

Personal Tax Deduction: Every UK taxpayer has a personal tax deduction against the sum of all Chargeable Gains.

CGT Rates: Capital Gains Tax Rate is derived from one’s total annual income.

Declaration and payment of taxes: Taxpayers must declare their income and capital gains in an annual tax return and pay the relevant taxes.

Calculation of Tax on Capital Gains
For the calculation of capital gains tax, one needs to add up the base cost of acquisition of cryptocurrency, including incidental costs such as commissions and transaction fees. The difference between the sale price and the base cost is the capital gain liable for taxation.

Record Keeping
HMRC requires records of all cryptocurrency transactions, with details of the date of the transaction, the type of cryptocurrency, the volume, the value in pounds sterling, and wallet addresses, the details of the recipients and senders for at least five years after the due date of the tax return.

Tips on Paying Taxes

Seek expertise: In view of the complexity and frequently changing tax laws about cryptocurrencies, this is a matter wherein you are highly recommended to consult a tax advisor.

Using cryptocurrency accounting software: A range of cryptocurrency accounting software exists to help account for transactions and automatically calculate tax liabilities.

Understanding and following proper taxation procedures for cryptocurrencies in the UK in 2024 are foundational to avoiding any penalties or other unsavory consequences. Given the dynamic nature of the cryptocurrency market and tax laws, it is important to stay updated with the latest changes and practice.

A table with the main tax rates in the UK:

These rates provide an overview of the rough taxation that takes place in the UK with regard to personal income, capital gain, corporate income, and VAT.

If you are going to start a crypto asset company in the UK, our dynamic and experienced team is here to assist you. We provide complete consultations on the establishment of a crypto company, obtaining a crypto license in the UK, accounting, introduce you to all cryptocurrency regulations in the UK and taxation and ensure efficiency, confidentiality as well as zealous attention to every detail that contributes to the success of your business. Do not hesitate to contact us right now for an individual offer.

Lawyers also provide legal support for crypto projects from Regulated United Europe and assist with adaptation to MICA regulations.