Did you know the UK Government charges tax on cryptocurrencies? Just because these assets are considered “decentralized,” it doesn’t mean you can avoid the taxman. Whether you’re buying and selling crypto assets or mining Ethereum (ETH) on your gaming PC for passive income, you’re going to need to declare profits.
How to pay taxes on cryptocurrency
Cryptocurrencies are treated as shares in stocks or other commodities in that you’ll be expected to pay capital gains tax on any profits made. For instance, if you were to purchase 3 Bitcoin (BTC) for £35,000 and then sell them a year later for £40,000, you’ll be charged capital gains tax on that £15,000.
Working out just how much tax you’ll be charged is pretty straightforward:
- Set aside your taxable income as well as taxable gains.
- Deduct your tax-free allowance from your crypto gains.
- Add the remaining amount to your taxable income.
- If you’re within the basic income tax band, you’ll pay 10% on what’s left. If it’s above the basic income tax band, you’ll pay 20%.
Confused? Here’s a quick example using our £15,000 gains from BTC:
- We have a taxable income of £30,000 and capital gains of £15,000.
- Our tax-free allowance is £12,570, which leaves £2,430 that’s added to our taxable income.
- With a taxable income (and post-calculated capital gains) of £32,430 we’re in the basic income tax band (up to £37,700), meaning we pay 10% on our calculated crypto gains.
- We’ll need to declare to pay 10% of the £2,430, which is £243. So, in total, we’ve been charged £243 for the £15,000 earned from selling Bitcoin.
In order to declare your cryptocurrency gains to HMRC, you can report and pay capital gains tax directly or file a Self Assessment tax return.
How to pay taxes on mining
If you’re mining cryptocurrency, be it through a mining pool or by selling your computing power on a service like NiceHash, you’ll need to pay tax in the UK. The UK Government views this as a means of income, which it technically is, and as such will be covered by your income bracket.
Not only will you need to declare how much you made from mining, but you’ll also need to calculate capital gains tax once the Bitcoin has been sold. The easiest way to do this is to keep records of the Bitcoin mining, adding that to your income tax, and then working out any profits from an eventual sale for capital gains.
The easiest way to calculate how much additional tax you need to pay on top of your mining is by filing a Self Assessment tax return. It’s worth doing this even if you already use PAYE through full-time employment. Should you require additional details on UK tax for crypto mining, be sure to reach out to HMRC for clarification.