UK CRYPTO TAX 2

UK Crypto Tax

UK CRYPTO TAX

Despite the fact that the UK has not yet established a proper regulatory framework for cryptography, Her Majesty Revenue (HMRC) has already published the Cryptoassets Manual, where all tax obligations related to cryptography, are explained within the existing legislation. If you are trying to understand how your crypto activities can be taxed in the UK, keep in mind the main principle – HMRC taxes are cryptoassets based on what the holder uses them for.

The guide is based on two policy documents – Cryptoassets: Personal Tax and Cryptoassets: Business Tax, published in December 2018 and November 2019 respectively. According to these papers, cryptoassets (aka tokens, cryptocurrency) are cryptographically secured digital value representations or contractual rights that can be transferred, stored, and sold electronically.

The main types of taxable cryptos are:

  • Token exchange (used as payment and investment)
  • Useful tokens (available only within a specific DLT ecosystem where their owner can exchange them for products or services and trade them)
  • Security tokens (granting special rights or interests in business, such as ownership, refund of a certain amount of money or right to a share in future profits)
  • Stablecoins (tied to something that is believed to have a stable value, such as fiat money or precious metals, making them less volatile)

All responsible crypto companies must adhere to existing deadlines and deadlines, such as the tax year, which runs from April 6 to April 5 of the following year. Each year, taxes are determined on the basis of the persons involved in the business and depend on the nature of their activities, as well as such indicators as income, profits and costs.

Based on the legal business structure, cryptoasset companies might be subject to paying the following taxes:

  • Corporation Tax (CT) – 19%
  • Digital Services Tax (DST) – 2%
  • National Insurance Contributions (NIC) – rates vary depending on employee’s earnings
  • Value Added Tax (VAT) – 20%
  • Stamp Duty (SD) – 0.5%

When clarifying tax treatment, the Cryptoassets Manual mostly focuses on the businesses engaging in activities that involve exchange tokens (e.g. Bitcoin). Such activities include:

  • Buying and selling exchange tokens
  • Exchanging tokens for other assets (including other types of cryptoassets)
  • Crypto mining
  • Supplying products or services in return for exchange tokens

Corporation Tax

Corporate tax is levied on the profit and profit of the company. In order to calculate the tax correctly, it is necessary to register each token exchange transaction that has been conducted – just as for any other type of asset.

Crypto asset is not considered a currency or money and is therefore taxed as traditional assets. In addition, it means that the following money-related corporate tax laws do not apply to crypto assets, including exchange tokens:

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

If the activity related to the exchange of tokens is not a trading activity and is not subject to taxation of the corporation in any other way (for example, non-loan relations or rules of intangible fixed assets) then it is considered that the disposal of capital and any profit, It is generally taxable as a taxable profit. Moving tokens between public addresses (wallets), which the company controls with profit, is not considered disposal.

Exchange tokens are considered paid assets for a corporation tax if they can be property and have a value that can be realised. In order to determine whether a cryptographic company is obliged to pay tax to a corporation on its taxable assets, profits or losses must be calculated after the management of currency markers.

All profits must be reported to HMRC at the time of filing the company’s tax return. In addition, like any other business, each cryptographic company can claim discounts and bas-reliefs that will affect the final amount of the corporation tax.

The following business costs are deductible:

  • The amount originally paid for the asset
  • Transaction fees paid for having the transaction included on the distributed ledger
  • Advertising for a purchaser or a vendor
  • Professional costs to prepare a contract for the acquisition or disposal of the tokens
  • Costs of making a valuation or apportionment to be able to calculate gains or losses

Digital Services Tax

Digital Services Tax is paid on the revenues that are sourced from the UK users of certain digital activities. An online marketplace for selling products or services is one of the three digital services activities defined for the purposes of the Digital Service Tax. A crypto exchange falls within this category and is therefore subject to the tax.

According to the Digital Service Tax Manual, an online marketplace definition consists of the following parts:

  • The service enables users to advertise and/or sell particular products or services to other users
  • The main purpose, or one of the main purposes, of the service is to facilitate the sale by users of particular products or services

The sale doesn’t necessarily have to be concluded on or through the exchange. The exchange can merely facilitate advertising or enable the sale to take place.

An exemption from the definition of online marketplace is applicable when more than a half of the marketplace revenue during the financial year is sourced in connection with the facilitation of the trading of financial instruments, commodities or foreign exchange. Since crypto assets don’t fall within any of these categories, it’s unlikely that crypto asset businesses will be exempt from the tax.

Value Added Tax

Any goods or services sold in exchange for tokens are subject to VAT under normal VAT rules. The taxable value of the services or products provided is expressed in the pound sterling value of the exchange tokens at the time of the transaction.  However, when cryptocurrencies are exchanged as goods and services, the supply of the cryptocurrency itself will not be subject to VAT.

Cryptocurrencies received by miners for their token-exchange activities will usually be outside the scope of VAT, because the activity does not constitute an economic activity for VAT purposes due to insufficient connection between any provided services and because of the lack of customers for mining.

Fees paid in excess of the value of the exchange tokens for any transaction in exchange for the token are exempt from VAT, provided that 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 exempt from VAT.

Venture Capital Schemes

Crypto asset companies can seek tax-advantaged investment status under the venture capital schemes, provided that they (including investors and proposed investment) meet the prerequisite requirements, specific to each scheme. Currently, crypto-specific conditions aren’t stipulated, which means all crypto asset companies are treated as any other business.

The key qualifying condition of the venture capital schemes is that a company’s core activity must be a qualifying trade which is conducted on a commercial basis with a view to the realisation of profits and which isn’t an excluded activity. Companies trying to determine whether they are eligible can seek HMRC’s opinion via the advance assurance service.

How do I pay taxes on crypto in UK in 2024?

In 2024, the tax treatment of cryptocurrencies in the UK continues to evolve, reflecting the country’s desire for a balanced and fair tax system for digital assets. The UK tax authority, HM Revenue & Customs (HMRC), provides clear guidance on the taxation of cryptocurrencies, treating them as personal property rather than currency or money. It is important to understand the key aspects of these rules in order to tax cryptocurrency gains correctly.

Categories of Taxation

Cryptocurrency income in the UK can fall into different categories of taxation depending on the nature of the activity:

  • Capital Gains: Capital gains derived from the sale of cryptocurrency are usually subject to Capital Gains Tax (CGT). It includes the exchange of one cryptocurrency for another, as well as the use of cryptocurrency to purchase goods and services.
  • Income Tax: Income from mining, trading as a business activity or receiving cryptocurrency as a salary is subject to Income Tax.

Taxation Highlights

  • Personal Tax Deduction: Every taxpayer in the UK is entitled to a personal tax deduction, which also applies to capital gains.
  • CGT rates: Capital Gains Tax rates depend on an individual’s total annual income and can vary.
  • 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

When calculating capital gains tax, it is important to consider the base cost of acquiring the cryptocurrency, as well as any associated costs such as commissions and transaction fees. The difference between the sale price and the base cost constitutes the capital gain subject to tax.

Storage of Records

HMRC requires taxpayers to keep detailed records of all cryptocurrency transactions for at least five years after the tax return due date. This includes transaction dates, cryptocurrency types, volumes, value in pounds sterling, wallet addresses and information about recipients and senders.

Tips on Paying Taxes

  • Consult an expert: Given the complexity and ever-changing nature of the tax laws regarding cryptocurrencies, it is highly recommended that you consult a tax advisor.
  • Using cryptocurrency accounting software: There are many cryptocurrency accounting tools that can help track transactions and automatically calculate tax liabilities.

Conclusion

Understanding and complying with the tax requirements for cryptocurrencies in the UK in 2024 is key to avoiding penalties and other unpleasant consequences. Given the dynamic nature of the cryptocurrency market and tax laws, it is important to stay up to date with the latest changes and practices.

A table with the main tax rates in the UK:

Type of tax Tax rate
Income tax Personal deduction, then rates from 20% to 45%
Capital gains tax 10% (base rate) or 20% (top rate) for most assets
Corporate tax 19%
Value Added Tax (VAT) 20% (standard rate), 5% (reduced rate) and 0% (zero rate)

These rates provide a general overview of taxation in the UK, including taxation of personal income, capital gains, corporate income, and VAT.

 

If you’re planning to launch a crypto asset company in the UK, our experienced and dynamic team of Regulated United Europe (RUE) is here to help. We offer comprehensive advice on crypto company formation, crypto licence in the UK, accounting, familiarise you with all cryptocurrency regulations in the UK and taxation and guarantee efficiency, confidentiality as well as meticulous attention to every detail that impacts your business success. Contact us now to receive a personalised offer.

Also, lawyers from Regulated United Europe provide legal support for crypto projects and help with adaptation to MICA regulations.



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