Rather than an overly complex overview of bitcoin tax, which can quickly become a minefield, let’s set out some real-life examples you may have experienced, and what you should do.
Lets split between 2 types – Bitcoin Investors and Bitcoin Traders.
If you are not sure which category you fall into (from a legitimate HMRC tax perspective, not some outdated article you may have found online) then read on or speak with qualified bitcoin tax accountants Harvex.
By this we mean real investments, not crypto-trading.
We mean buying bitcoin, sitting on it for a period of time, and then selling it.
I bought some Bitcoin
Firstly, buying any crypto- whether Bitcoin, Ethereum or any of the other – is not a taxable event. What this means is, you do not have to pay tax when you buy cryptocurrency, you do not need to report your purchase of Bitcoin to HMRC.
If at any point you invested in digital assets, but did not liquidate (sell) it back into fiat (e.g GBP) then you will not even need to file a tax return. You are simply holding an investment.
I sold my Bitcoin
Now, as with most investments in the UK, if you sell, you may incur a tax charge.
The tax charge for non-residential property investments (i.e Bitcoin) is 10% or 20% on your gains, not sale price. Whether you are charged 10% or 20% capital gains tax depends your total annual income (including any income from digital assets).
Remember – HMRC give you a £11,300 of capital gains tax free! (For the tax year ending 05 April 2018).
Bitcoin tax examples for investors
For these examples, we are assuming you have a main job, and were genuinely investing in Bitcoin – rather than being a trader with no other income or investments. We will assume allowances for the tax year ending 05 April 2018.
- I earned £25,000 through payroll, bought BTC for £2,000 and sold it for £10,000
In this case, you have no tax on the BTC sale because your gain of £8,000 was below the tax allowance of £11,300.
- I earned £25,000 through payroll, bought BTC for £2,000 and sold it for £20,000
In this case – you have a profit of £18,000 😊. An allowance of up to £11,300 profit is tax free, giving you a taxable gain amount of £6,700.
You’ll recall earlier we mentioned the tax is 10% or 20%. So in this example, your income and BTC investment put you in the 10% Bitcoin tax bracket.
Your total tax bill would therefore be 10% of £6,700 which is £670.
- I earned £50,000 through payroll, bought BTC for £2,000 and sold it for £20,000.
Again, you made £18,000 investment profit, of which £11,300 is within the tax-free allowance on capital gains. So you will only be taxed (at either 10% or 20%) on £6,700 of this gain.
However in this example, you’ve earnt £50,000 as your main income. This would put you into the 20% CGT tax bracket, £6,700 at 20% means your tax bill would be £1,340.
There are hundreds of scenarios that can be used to calculate your tax – but in the case of investments, the tax is either 10% or 20% – this is important when considering the next section.
Bitcoin Trading Tax
Let’s say you are a trader. Your tax is likely to be higher because HMRC view this as trading, rather than investing and they will have access to bank accounts if needed. There are a few crypto friendly bank accounts listed here.
Tax free income for traders = £11,500 (almost the same as £11,300 tax free on investments).
Let’s jump to the examples to explain.
Bitcoin tax examples for traders
Tax Liability Example 1
My full time job is a trader. I purchased a range of cryptocurrencies for £2,000, then traded them, and ended up with £20,000, i.e £18,000 profit.
In this case, your total tax bill is applied to only £6,500, (because you are allowed up to £11,500 tax-free on +) – so in this example your tax bill is £2,300!
The big question: Why is this so much higher than investing? – The answer is, because you are a trader you must pay tax and national insurance on your profits because this is your main income – it is not a capital gain therefore is subject to income tax, not capital gains tax.
Learn how cryptocurrency tax loss harvesting can be used to reduce your bill.
Tax Liability Example 2
My full time job, paid on payroll is £25,000. I traded crypto in my spare time in the evenings and weekends and made £18,000 profit over the tax year.
In this case, your total additional tax on the trading element- the £18,000 profit – is £4,600. The reason this jumps up again, is that your tax free allowance on income has already been used up by your payroll income.
The above brief and simple examples show why HMRC are very interested the true reason behind your crypto activities.
Investing and Trading income must be declared on your Self-Assessment Tax Return.
I don’t know if HMRC will class me as an Investor or Trader?
Firstly – you’re not alone. There is a lot of information online that is at best unclear, and at worst misleading.
HMRC have a list of criteria to assess whether you are classed as an investor or trader.
For example: – Is this your main source of income? Are the frequency and the volume of transactions very high? And many more questions to help assess into which tax bracket your activity falls.
Beware! Your personal view of your BTC / crypto holdings may not align with HMRC’s! If you are unsure in any way we recommend taking professional advice.
What else do I include on my Self-Assessment?
Remember – other income you have received during the tax year, maybe via dividends, maybe via PAYE (monthly payroll) can potentially change the tax you need to pay on your cryptocurrencies.
Make sure you include all your income. HMRC have your payroll details already – so it won’t be hard for them to check!
When do I need to pay my Bitcoin Tax?
Payments for Bitcoin tax (as with most UK individual tax), is split between being due on 31 January and 31 July.
Tax return ending 05 April 2018
- Tax return due and tax payment due 31 Jan 2019
- Second tax payment on account due 31 July 2019 (nb.tax on account may not apply to everyone)
I’ve never declared tax on my Bitcoin sales – what do I do?
The first thing to remember is HMRC will not turn a blind eye to unpaid tax, even if crypto tax guidance is limited. If you are in this situation, we advise collating your past un-declared transaction history together and clearing up the situation.
Can someone else handle all this for me?
The good news is Yes – Absolutely! Specialist Cryptocurrency Accountants such as Harvex can assess whether HMRC will classify you as an investor or trader, and Harvex can correctly calculate your gain or loss, ascertain your tax liability, and file everything directly with HMRC.