The year 2022 has started with a crypto winter. Bitcoin prices have plummeted, and with it, all other cryptocurrencies similar to bitcoin tanked in value. Bitcoin is transitioning from being a currency (or asset, as most of the world’s legislatures deny it the status of currency) to becoming an important indicator of the global market, specifically, the stock market indicator.
Many companies are adding crypto assets to their balance sheet, and Bitcoin remains the most popular, along with Ethereum. The status of legality of the Bitcoin in the world ranges from El Salvador, where it is declared the legal tender, to China and their ban of everything related to cryptocurrencies.
We will go through the status of bitcoin and similar cryptocurrencies, is it legal to buy and own in the UK, what are the legal implications of mining, how the legislature looks at trading, and most importantly – how is cryptocurrency taxed in the UK.
Buying and owning cryptocurrency in the UK
Cryptocurrency regulation in the UK is still hanging in the air. Special regulation is not yet in effect, but while it is not recognized as a monetary instrument or security, it’s not illegal to own it, buy it, sell it, or mine it.
What authorities did regulate is what crypto exchanges and services are legal to operate within the UK. This means that you can use Coinbase, Coinfloor, Kraken, or any other approved crypto trading platform to buy or sell bitcoins or other cryptocurrencies.
Further down we will take a look at taxation regulations since in the current legal vacuum, bitcoins are viewed by the state as – assets. In essence, buying a bitcoin is the same as buying a house, so when you decide to sell, it will be seen in the eyes of the law, as selling property. This incurs a capital gain tax.
Good to know is that certain companies will accept bitcoin in exchange for goods and services.
Is Bitcoin mining legal in the UK?
Yes. There are no legal obstacles to mining cryptocurrencies in the UK. Mining or crypto mining is a process of creating new bitcoin. Powerful computer processors, named ‘mining rigs’ are solving cryptographical problems. Basically, with a lot of electric energy spent and lots of noise and heat produced, a new bitcoin is born.
How lucrative the mining is, depends on the electricity bill in your county, but the soaring price of bitcoin might make it yet a profitable side gig in the UK. Professional miners, owning huge plants are moving to the areas in the world where the electricity is cheap, mostly Central Asia or South America.
Interestingly enough, the UK’s tax laws view mined bitcoin as income tax, not as a capital gain.
The UK tax laws and the bitcoin
Her Majesty’s Revenue and Customs, the tax authority of the UK government issued guidance on cryptocurrency tax. It was one of the first regulatory bodies in the world to do so. Very interesting, and fortunate for everyone involved in the crypto activities, though HMRC sees bitcoin and other cryptocurrencies as assets, they declared special cases when Capital Gain Tax is not applied, but Income Tax instead.
Simply owning bitcoin is not subject to tax. The moment you sell it, swap it, spend it or earn it – it constitutes a tax event. Similar to owning property (which is what HMRC considers cryptocurrencies to be): if you rent your house, that’s income, if you sell it, that’s capital gain.
Crypto capital gains
Every time you cash in or dispose of your asset, you will pay Capital Gains Tax.
- Selling bitcoin for GBP or EUR, USD, etc.
- Trading bitcoin for another cryptocurrency
- Spending bitcoin on goods and services
- Gifting bitcoin (to anyone other than your spouse)
Again, the good thing is that you are not taxed on the value of the transaction, just the profit you made.
Capital gains are taxed according to how much you earn. Up to 50,270 GBP, you will pay 10% on your bitcoin gains. If you earn more, you will pay 20%.
The price of cryptocurrency and any additional fees are the basic cost for profit calculations, so you should make sure to keep all the records of the purchase. At the moment when you dispose of your crypto, the value at disposal minus the cost basis gives either a positive or a negative value. If the value is negative, that’s a loss. If it’s a positive, that’s the capital gain, and you pay the Capital Gain Tax.
The UK provides a tax break at 12,300 GPB. If you made no more than this amount in a fiscal year, you pay no CGT. Any losses you’ve had while trading bitcoin or other cryptocurrencies will offset your capital gains.
Every time you earn from activities within the crypto space, you will pay Income Tax.
- Getting paid in bitcoin
- Collecting staking rewards
- Mining tokens
- DeFi investment yields (there is wiggle room here)
- AirDrops (free token rewards)
If you are getting new coins or tokens based on your activities or owning cryptocurrency, that’s income and it is subject to Income Tax.
The first 12,570 GBP you earn is not taxed. That’s considered a personal allowance. Up to 50,270 GPB in a fiscal year is the basic rate, and you pay 20% on your next 37,699 GBP. So the personal allowance sum is always tax-free. Annual income up to 150,000 GBP is in the 40% tax band. Again, the first band is free, the next is 20% and you would pay 40% on the next 99,729 of income.
The UK is not the friendliest country for bitcoin and similar cryptocurrencies. Be mindful of your actions and well aware that HMRC is forcing crypto exchanges to cooperate, so don’t try to evade taxes, and you’ll be fine.