Cryptocurrency, particularly Bitcoin, have risen in prominence over the last few years – with companies like Telsa accepting them as payment and countries like China banning them outright. Their value has risen, fallen and risen again, but investors are still torn over if they are still a good long term investment or not.
What is not open to opinion though is how any gains made on trading in them are taxed – you will be subject to capital gains tax on any realised gains, and need to report them on your self-assessment tax return in the relevant year. If you have not sold or disposed of them, then the gain is ‘unrealised’ and you do not have to pay tax on it.
In the UK, the tax year runs from 6th April one year to 5th April the following year and any realised gains you make in that year need to be reported on the relevant return. The current tax year is 24/25, running from 6th April 2024 to 5th April 2025, due for filing and payment with HMRC by 31st January 2026.
Capital gains
Any gains you have made on the disposal of capital assets – second properties, shares, cryptocurrencies, etc – during that time need to reported on your tax return and are subject to capital gains tax.
You will be taxed on the profit – what you received less what you originally paid – less the annual allowance for capital gains. In the 2024/24 tax year the allowance is £3,000 which is significantly down from previous years.
For example, say you bought 100 bitcoins for £100 each two years ago so a total cost of £10,000, and in the 24/25 year you sold them for £50,000. That gives you a profit of £40,000 and after the allowance has been deducted it gives you a chargeable gain of £37,000.
Rate of tax
The rate of capital gains tax you pay on the cryptocurrency gain depends on the rate of income tax that you pay.
If you pay at the higher rate – earning over £50,271 or over and paying income tax at 40% then you will pay 20% capital gains tax on the chargeable gain, £7,400 in the example above.
If you pay tax at the basic rate – earning up to £50,270 and paying income tax at 20% – then it’s a bit more complicated, and depends on the size of the gain and your other income.
You need to add your taxable income (after personal allowance and any other reliefs) to your chargeable capital gain (after deducting your annual allowance) to come up with a total figure. If this total is within the basic income tax band then you’ll pay 10% on your currency gain, but you’ll pay 20% if it is above this.
How can I avoid it?
Put simply, you can’t. But you can limit your capital gain tax bill by being clever.
The capital gains allowance is annual, so if you dispose of all your holdings in one year then you will only be able to use one annual allowance, resulting in a higher tax charge. However, if you dispose of your cryptocurrency over several years and spread the gain, then you can take advantage of each year’s allowance to reduce your liability. If your total annual capital gain is under the annual allowance then there is no capital gains tax to pay at all.
Mining
The above applies to people who have bought and sold the cryptocurrencies to make capital gains, but if you have ‘mined’ them – the system whereby computer users calculate complex algorithms required to verify each transaction in the blockchain and be rewarded with currency – then this is treated differently.
HMRC regard that as a trade, not a capital gain, so you would be subject to income tax and national insurance on the profits arising from them just as if it was a normal trade or employment. All your income you made from mining, less all your expenses incurred as a direct result of mining gives you your taxable profit. This will go on your self-assessment tax return as well as any other income.
The small print – do not ignore it!
It is important to note that you do not have to have received the physical cash from a capital gain for it to be chargeable. So, if you used the funds from the sale of your bitcoins to immediately buy another cryptocurrency or buy a property, you have still made a gain and need to declare and pay on it.
Just because cryptocurrencies are not regulated does not mean they are not taxable. When large amounts of money start being deposited in bank accounts by sellers, both the banks and HMRC will start to ask questions, so do not think you can get away with not paying what you owe. Read our article on tax evasion if you are not sure what that is.
Please be aware that this article is written under the basis of UK tax law and the basis that you are liable to UK tax. Tax systems in other parts of the world may operate differently, and those UK citizens based outside the UK may be subject to different tax laws.
If in doubt about capital gains tax – or any other tax for that matter- then get in touch with us on the details above.