In the UK, crypto is treated similarly to shares and is taxed in the same way. This means that all crypto is taxable in the UK.
How much tax do you pay on crypto in the UK?
Your crypto will either be subject to Capital Gains Tax or Income Tax in the UK. This is determined by the type of transactions you're making with your crypto. If you are making a transaction that generates income, then you will pay Income Tax. If you are making a transaction that generates a Capital gain, then you will pay Capital Gains Tax.
UK Crypto Capital Gains Tax
HMRC gives every UK taxpayer a Capital Gains Tax Allowance of £6,000 a year (2023-2024 tax year), however this will be cut from April 2024 to £3,000.
HMRC sees crypto as a capital asset, so when you dispose of your crypto you'll pay Capital Gains Tax. Disposals of crypto include: selling crypto, trading crypto, spending crypto (on goods and services), and gifting crypto (unless to spouse or civil partner). You will only pay tax on crypto gains, so whenever you've made a profit.
With regards to DeFi transactions - in particular lending and staking - HMRC guidance states that these transactions may be subject to Income Tax or Capital Gains Tax depending on the "nature of the transaction" and whether that transaction has the nature of capital or the nature of income.
UK Capital Gains Tax Rates
In the UK, all capital gains are taxed under the same tax rates. They do not have short-term and long-term Capital Gains Tax rates. The amount of Capital Gains Tax you pay will depend on how much you earn. You will pay either 10% or 20% depending on the income level you fall under.
If you earned less the £50,270 (total income) you will pay 10% on crypto gains.
If you earned more than £50,279 (total income) you will pay 20% on crypto gains.
UK Crypto Capital Losses
In the UK, you can offset unlimited capital losses against gains, reducing them to the £6,000 tax-free allowance and thus avoiding Capital Gains Tax. You can carry forward these losses indefinitely by registering them on your self-assessment tax return. HMRC allows four years to register losses.
UK Cost Basis Method
HMRC has specific rules for crypto cost basis methods known as share pooling. This prevents manipulation of gains and losses through rapid buy-sell action and prevents tax loss harvesting. Instead of tracking the cost basis of each unit of cryptocurrency individually (as done in methods like First-In-First-Out (FIFO) or Last-In-First-Out (LIFO)), share pooling involves averaging the cost basis of all units within the pool.
HMRC defines three additional rules for the share pooling system which further impact your cost basis calculation:
Same-Day Rule: If you buy and sell the same type of crypto on the same day, you the cost basis for calculating capital gains tax (CGT) is the cost of the crypto acquired on that day.
Bed and Breakfasting Rule: The 30-day rule states that if an individual sells an asset (such as a share or cryptocurrency) and buys the same asset back within 30 days, the purchase cost of the newly acquired asset must be used as the cost basis for the sold asset.
Section 104 Rule: If the above two rules don't apply to any of your crypto transactions, you need to use this cost basis method when calculating your crypto taxes. This works by calculating an average cost basis for a pool of assets by adding up the total amount paid for all assets and dividing it by the total amount of coins held.
UK Income Tax on Crypto
The crypto Income Tax rates are the same Income Tax bands for your regular income, as seen in the table below.
Up to £12,570
£12,571 to £50,270
£50,271 to £125,140
In the UK, crypto transactions that are classified as income are taxed at your regular Income Tax band. Crypto is taxed as income when it comes from the following:
Getting paid in crypto
Tax Free Crypto in the UK
The following are instances of tax free crypto situations:
Buying crypto with GBP.
Transferrring crypto between your own wallet or exchange accounts.
Donating crypto to charity.
Gifting crypto to your spouse.