In the realm of cryptocurrencies, Bitcoin holds a special place as the pioneer that introduced the world to blockchain technology. Looking at the massive profits some investors have realised over the past few years, it is only natural that the tax authorities in the UK would like to get their cut.
In the UK, Bitcoin tax is an area that has garnered increasing attention as more investors have started engaging in Bitcoin trading. In this article, we will delve into the specifics of taxes on Bitcoin in the UK and how to manage your Bitcoin profits responsibly to stay in line with tax regulations.
Do you pay tax on Bitcoin in the UK?
As a crypto enthusiast or investor, you might be wondering, "Do you pay tax on Bitcoin in the UK?" The answer is, yes, you do. Bitcoin and other cryptocurrencies are not exempt from taxation in the United Kingdom. In fact, UK crypto taxation is such an interesting topic that we’ve written a whole guide about it that goes way beyond Bitcoin. You can find it here: crypto taxes in the UK.
How much tax do you pay on Bitcoin in the UK?
Bitcoin taxation is based on two tax categories: capital gains tax and income tax.
Capital gains tax ranges from 10% to 20% and applies whenever Bitcoin is disposed of in some way. Income tax ranges from 20% to 45% and applies to any Bitcoin received as payment or mining reward.
Capital gains tax (CGT) on Bitcoin profits
Capital Gains Tax applies whenever you dispose of Bitcoin in some way. This includes:
- Selling Bitcoin in exchange for Fiat
- Swapping Bitcoin for other crypto
- Gifting Bitcoin unless it's to your spouse
- Spending Bitcoin
The capital gains tax rate you pay on Bitcoin profits depends on your total taxable income. For higher rate taxpayers (those earning over £50,270 in the 2022/2023 tax year), the tax rate for cryptocurrencies is 20%.
However, the capital gains tax only applies to profits above the tax-free allowance – the Annual Exempt Amount.
For the tax year 2022/23, this allowance was £12,300 for individuals, and for the tax year 2023/24, it has been reduced to £6,000. If your profits from selling Bitcoin or other assets stay below this threshold, you won’t have to pay capital gains tax.
Read more about the Annual Exempt Amount here: UK Crypto Tax-Free Allowances.
Let's use an example. Say your annual income is £50,000, and you've made a gain of £13,000 from selling Bitcoin.
- First, subtract your tax-free allowance from your total gain: £13,000 (gain) - £12,300 (allowance) = £700. This £700 is your taxable gain.
- As a higher rate taxpayer, your capital gains tax rate for cryptocurrencies is 20%. So, you'll pay 20% tax on the £700, which equals £140.
So in this case, you'd owe £140 in capital gains tax on your Bitcoin sales.
Income Tax on Bitcoin
Income tax rates in the UK vary depending on the level of income and where in the UK you reside.
Income tax applies whenever you receive Bitcoin as a payment or a reward for something. This includes payment for goods and services, mining rewards and airdrops.
There are three main bands for income tax rates: basic rate, higher rate, and additional rate. For the tax year 2022/2023, the rates are as follows:
<div fs-richtext-component="info-box" class="info-box"><div class="flex-info-card"><img src="https://assets-global.website-files.com/65098a145ece52db42b9c274/650c6f4cef4c34160eab4440_Info.svg" loading="eager" width="64" height="64" alt="" class="icon-info-box"><div fs-richtext-component="info-box-text" class="info-box-content"><p class="color-neutral-800">According to the Autumn Statement the threshold for the additional rate is lowered from £150,000 to £125,140 from April 2023.</p></div></div></div>
Let's look at an example.
Say you're a freelancer with an annual income of £30,000, and you've been paid £5,000 worth of Bitcoin for a project. Your total income for the year is now £35,000, which still falls within the basic rate band. Therefore, you'd pay 20% tax on your Bitcoin earnings, which equals £1,000.
You’ll find additional information about this topic in our article: UK crypto tax rates
Bitcoin Cost Basis Methods
In the context of Bitcoin transactions, it is essential to understand the cost basis methods prescribed by HMRC for calculating capital gains and losses. These methods are particularly relevant for investors engaging in multiple transactions involving identical assets.
HMRC mandates the use of share pooling as the crypto cost basis method. Share pooling is implemented to prevent investors from manipulating the Average Cost Basis (ACB) method by engaging in rapid buy-and-sell transactions, which could distort the representation of gains and losses.
There are three cost basis methods specified by HMRC, which must be applied in the following order:
1. Same Day Rule
Under the Same Day Rule, if an investor buys and sells the same cryptocurrency, like Bitcoin, on the same day, the cost basis used to calculate gains or losses is based on the value of the assets on that specific day. If the quantity sold exceeds the quantity bought on the same day, the investor must proceed to the next rule.
2. Bed and Breakfast Rule
The Bed and Breakfast Rule applies when an investor sells and then repurchases the same cryptocurrency within a 30-day period. The cost basis used to calculate gains or losses is based on the value of the assets purchased within this 30-day window. If the quantity sold exceeds the quantity repurchased within this timeframe, the investor must proceed to the final rule.
3. Section 104 Rule – Share Pooling
The Section 104 Rule, also known as Share Pooling, is applied when neither the Same-Day Rule nor the Bed and Breakfasting Rule are applicable to the transactions. Under the Section 104 Rule, an average cost basis is calculated for a pool of assets. This is done by summing the total amount spent on all assets in the pool and dividing it by the total quantity of coins or tokens held.
Can you use Bitcoin losses to offset taxes?
In the United Kingdom, the answer is yes – you can use losses on your Bitcoin investments to offset taxes on capital gains. This strategy is known as tax loss harvesting, and it can be an effective way to manage your tax liability.
Here’s how it works: if you sell Bitcoin at a loss, you can use that loss to reduce the amount of capital gains you have made in the same tax year. For instance, if you made a profit of £10,000 on selling other assets but incurred a £4,000 loss from selling Bitcoin, you can offset the loss against the profit. In this example, you would only need to pay capital gains tax on £6,000 instead of £10,000.
Moreover, if your losses exceed your gains, or if you do not have any gains, you can still make use of these losses. You have the option to carry forward the leftover losses to offset against future capital gains. This could be particularly useful in a scenario where you anticipate significant gains in the future.
However, there are some crucial points to remember. Firstly, you must report your Bitcoin losses to HMRC to claim them against your capital gains. It’s also vital to keep accurate records of your transactions, including the dates and amounts.
Read our guide to learn more: Offsetting Crypto Losses
How do you pay tax on your Bitcoin profits?
Once you've calculated your gains or losses, it's time to report them to HMRC. This can be done through a Self Assessment tax return.
- Register for Self Assessment: If you're not already registered, you'll need to sign up for Self Assessment. You can do this through the HMRC website.
- Fill in the Capital Gains Summary pages: In the tax return, you'll need to complete the Capital Gains Summary pages, reporting the total gains or losses from all sources, including cryptoassets.
- Submit the Tax Return: You should submit your tax return online by 31st January following the end of the tax year. For example, for the tax year ending 5th April 2023, the deadline for online submission is 31st January 2024.
- Pay Any Tax Due: After submitting your tax return, you'll need to pay any tax due. The deadline for payment is the same as the deadline for submitting the tax return.
Learn more: How to report crypto to HMRC
Generating your Bitcoin tax report with Blockpit
Blockpit creates the most comprehensive Bitcoin tax reports in PDF format. Our crypto tax reports also contain clear explanations in terms of legal interpretation for submission to the tax authorities. So far, every tax report has been accepted by the tax office without a complaint.
The report provides information about all your balances and transactions and can be used as proof of origin with banks or tax advisors. It contains all relevant transactions of your account in the selected tax year and shows details such as timestamp, amount, asset, costs and fees of the individual transactions.
Using Blockpit couldn’t be easier:
1. Import your transactions
Blockpit offers direct integrations for crypto exchanges, wallets and DeFi protocols. Automatically import your transactions via API integration, wallet address synchronization, or by manually uploading an Excel file.
Discover all crypto integrations
2. Validate & Optimize
Blockpit offers smart insights and suggestions to optimize your tax report, fix issues, add missing values and to validate your transactions.
3. Generate your tax report
Generate your compliant tax report with the click of a button. Our tax engine calculates your tax report on the basis of the UK tax framework.