Cryptocurrency is taxable in the UK and not reporting your capital gains or income that is subject to tax to HMRC would be seen as tax evasion in the eyes of the law.
Think you’ve hidden your crypto from HMRC? Think again! Many crypto investors believe that because crypto is pseudonymous their activity is not visible to regulators; however this is not the case. All transactions are visible on the online ledger meaning that activity is traceable and can lead back to an individual, especially as KYC and regulation is on the rise. It is well known that HMRC have demanded user data from UK crypto exchanges and have sent educational nudge letters to crypto users in their sight. As regulation develops, more exchanges will be sharing information and there will also be more transparency across borders.
It’s important to remember that tax compliance is your responsibility, similar to someone earning cash in hand, whether HMRC are aware of your crypto activity or not, if it's taxable you should be reporting it.
If you do owe tax on your crypto then it is impossible to avoid paying it, if you have been active in crypto for a while but haven’t filed before you may also find you need to catch up with past tax years. However, there are ways to avoid paying tax on your crypto or reducing the amount of tax due moving forwards.
In this article, we will explore more about the laws surrounding the taxation of crypto in the UK and suggest some different strategies that you might be able to put in place to either avoid or pay less tax on your crypto.
How is crypto taxed in the UK?
In the UK, crypto can be subject to capital gains tax and income tax. Understanding the difference between them and when they will apply is crucial for understanding potential tax optimisation methods. Below is an overview but you can also see our UK Tax Guide to explore crypto taxation in more depth.
Crypto capital gains tax
In the UK, capital gains tax is applicable when you dispose of a crypto asset. A disposal can include selling, exchanging, gifting and purchasing goods or services using crypto. Tax is payable when your total capital gains exceed the annual capital gains allowance, at a tax rate dependent on your total annual earnings.
Crypto income tax
Some returns from crypto asset activity, such as mining, staking and liquidity pool rewards are treated as income and are taxed at your regular income tax rate.
To learn more about how cryptocurrency is taxed and how tax differs depending on activity check out our comprehensive UK cryptocurrency tax guide. Or, to quickly calculate the capital gain on your crypto portfolio try our crypto tax calculator.
What’s the difference between tax evasion and avoidance?
Tax evasion and tax avoidance are two distinct concepts with different implications for the individual.
Tax evasion refers to the illegal act of intentionally avoiding the payment of taxes through illegal methods, deliberately providing false or misleading information or withholding information to tax authorities. Tax evasion could involve concealing income, inflating expenses or engaging in fraudulent activity to reduce tax liability.
In the UK, it is a criminal offence and individuals found guilty of tax evasion can face criminal prosecution resulting in anything from fines and penalties to imprisonment. HMRC can impose penalties based on the amount of tax evaded, ranging from the percentage of tax owed to substantial fines, it's likely these will be higher where evasion is deliberate. There are also longer term consequences to consider such as damage to personal or business reputation and increased scrutiny from HMRC in subsequent tax years.
Tax avoidance, on the other hand, refers to the legal practice of minimising your tax liability within the boundaries of the law. It involves structuring financial affairs in a way that reduces tax obligations while remaining compliant by taking advantage of specific provisions, exemptions, deductions or incentives. With careful tax planning and using legitimate strategy, individuals can optimise their tax liability and this is considered lawful providing it is within the tax laws and regulations.
How to legally avoid paying crypto tax in the UK
While tax evasion is illegal, there are a few ways you can legally navigate crypto taxes in the UK to reduce your tax bill or avoid paying tax at all.
1. Take advantage of your tax-free thresholds
UK taxpayers are entitled to an annual capital gains tax allowance, (£6,000 for the active 2023/24 tax year). You will not be taxed on capital gains until they exceed this threshold, the allowance does not roll over to future tax years so it’s a case of use it or lose it!
To make full use of your allowance, you might strategically dispose of some assets. If you plan on “cashing out” your crypto in the future then you might consider splitting disposals across tax years to take advantage of your allowance and lower your tax bill in the long run.
Historically the UK has been quite generous with their capital gains allowance, however in the 2023 spring bill the government announced plans to reduce it dramatically over the next few years. The capital gains allowance has been lowered from £12,300 for the 2022/23 tax year, to £6,000 for 2023/24 and £3,000 for 2024/25 - so now really is the time to make the most of it!
2. Take advantage of the trading allowance
Another useful tax-free allowance for UK crypto investors is the trading allowance, which entitles each individual to £1,000 tax free additional income. You can simply deduct this from your total income when filing your self assessment report.
If your trading and miscellaneous income is under this threshold you won’t need to pay tax on it, or declare it to HMRC (unless you’re already filing a self assessment, in which case it’s recommended to report it on your return).
3. Take profits in a low income year
The rate of tax you pay on your crypto is dependent on your income tax bracket. In the UK, we have a progressive tax system meaning that as your income increases, so does your tax rate, so you can reduce your tax bill by disposing of your crypto in a low income year.
4. HODL! Hold your cryptocurrency
There’s no tax for holding your cryptocurrency (or transferring it between your own wallets) so a good strategy for avoiding crypto taxes is to HODL.
5. Harvest your crypto losses
None of us enjoy losing money, but, if you are holding any crypto assets at a loss in your portfolio then you could consider disposing of them. Once you have realised the loss, this will offset your gains, therefore reducing your tax liability. Find out more in our tax loss harvesting article.
Just be aware that wash sales are not permitted in the UK; HMRC’s bed and breakfast rule prevents you from selling and buying back the same asset to create an artificial loss.
6. Make a crypto donation to a registered charity or body
In the UK you are eligible for tax relief from capital gains when donating crypto to a registered charity, CASC or body for national purpose. It does not need to be an outright donation - the recipient can pay any amount up to your acquisition cost for the asset and you will not realise a capital gain. The disposal is treated as being made for no-gain and no-loss.
7. Gift crypto to your spouse
In the UK, gifting cryptocurrency to your spouse is viewed as a disposal at no-gain and no-loss so is therefore tax free. This is a great tax optimisation strategy that allows both individuals to take advantage of their capital gains allowance when the assets are disposed of. If one spouse is in a lower tax bracket then there’s also the benefit of a lower tax rate, meaning less tax to pay!
8. Hire a tax professional
A good accountant or tax professional will help you to put a tax strategy in place. Although hiring a professional to assist you with tax optimisation can be expensive, most crypto investors find that the tax savings are worth it!
9. Invest in crypto through your pension
As HMRC do not consider crypto assets to be money, they cannot be used to pay into a tax relievable registered pension scheme (RPS), however some alternatives are becoming more accessible. Tax benefits of pensions generally include tax relief on contributions for basic rate taxpayers, while high rate taxpayers can claim additional relief on their tax return.
Self-Invested Personal Pensions (SIPP)
In comparison to a normal pension, SIPPs give you more freedom, allowing you to choose and manage your own investments. Currently in the UK, crypto cannot be invested into a Self-Invested Personal Pension although we may see this change. In the meantime, to indirectly gain some exposure to crypto you could purchase shares in crypto-related companies via your SIPP, for example mining companies or crypto exchanges.
Small Self Administered Scheme (SSAS)
Some employers set up a Small Self Administered Scheme, to allow a small number of normally senior staff, directors or execs to build up a pot of money. These trustees run the scheme, deciding where money can be invested. The main benefit of a SSAS pension is the flexibility, it's possible to invest in assets that aren’t available for many other schemes like cryptocurrency.
10. Relocate to a low tax country
Sun, sea, sand… less tax! It seems a little extreme, but relocating to a country with a friendlier approach to crypto taxation is becoming a popular option for crypto investors and may be worth some research. Germany, Dubai and Portugal are just some of the favourite destinations right now, however changing regulations might affect this.
11. Invest in a small business
Using your crypto to invest in certain companies through The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) could make you eligible for tax reliefs.
The Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme is designed to help small, higher-risk trading companies raise finance by offering a range of tax reliefs to individual investors. If you are a UK taxpayer and invest in an eligible company through EIS, you can benefit from:
- Income tax relief of 30% on the amount you invest, up to a maximum investment limit of £1 million per tax year
- Capital gains tax deferral on capital gains made from assets used to invest in an EIS-eligible company, until you dispose of the EIS investment
- Capital gains tax exemption on any gains made on the sale of your EIS shares providing you hold the EIS investment for at least three years
- Loss relief that can offset your income or capital gains if the EIS investment becomes worthless or is sold at a loss
Seed Enterprise Investment Scheme (SEIS):
The Seed Enterprise Investment Scheme is similar to EIS but aimed at earlier-stage companies and offering more generous tax reliefs:
- Income tax relief of 50% on the amount you invest up to a maximum investment limit of £200,000 per tax year
- Capital gains tax exemption on any gains made on the sale of your SEIS shares providing you hold the SEIS investment for at least three years.
- Loss relief that can offset your income or capital gains if the SEIS investment becomes worthless or is sold at a loss
It's important to note that because companies are at an early stage, EIS and SEIS investments come with high risk. Additionally, the companies must meet specific criteria and be approved by HMRC for you to qualify for tax reliefs.
12. Use crypto tax software
Crypto tax software ensures you accurately calculate your crypto taxes and makes filing your tax return easy. It also allows you to keep track of your entire crypto portfolio during the active tax year, highlighting your unrealised gains and losses, helping you to easily identify opportunities for reducing your tax bill.
Remember, while tax optimisation is a legitimate strategy that can help you reduce your tax bill, it's crucial to adhere to the tax laws and regulations. Seeking advice from a qualified tax professional is recommended to ensure compliance and maximise the benefits available to you.