In recent years, cryptocurrency has gained popularity and attention. It has become one of the most popular investment assets in the UK. Thousands of investors are buying, holding, and trading cryptocurrency, and hoping to generate substantial returns. Making a profit from Bitcoin can be exciting, but you may have to pay Capital Gains Tax (CGT) on profits made when you dispose of Bitcoin or other cryptoassets.
This blog explains Bitcoin Capital Gain Tax (CGT), when you pay CGT on Bitcoin Profits, how to calculate it, and what you must do to comply with UK tax regulations.
Get in touch with our skilled professionals for expert UK tax and accounting solutions specialised to minimise your tax burden and resolve your financial challenges efficiently.
What is Capital Gains Tax on Bitcoin?
CGT is a tax applied to the profit you make after selling or disposing of an asset that has increased in value. CGT on Bitcoin is the tax applied to the profit after you sell or dispose of crypto assets. But the question here is, does Bitcoin count as an asset in the UK? The answer is yes.
HMRC generally treats cryptoassets as assets for tax purposes rather than as currency. This means you may have to pay CGT on Bitcoin profits, which occur when you sell it, exchange it for another cryptocurrency, or use it to purchase goods or services. You may also have to pay CGT when you gift Bitcoin to someone other than your spouse or civil partner.
Note: The tax is charged on the profit you make, not the total amount received from the transaction.
What is a Crypto Disposal?
In tax terms, whenever you transfer the ownership of your digital assets to someone else, a crypto disposal occurs. Disposing of crypto requires you to calculate and report capital gains or losses to revenue agencies like the HMRC.
Is There a Crypto Tax in the UK?
There is no separate cryptocurrency tax in the UK. Depending on how you acquire or dispose of cryptoassets, you may pay Capital Gains Tax or Income Tax. If you have cryptoassets such as Bitcoin as an investment, and dispose of them for the sake of profit, you may have to pay CGT on Bitcoin profits.
Furthermore, if you receive cryptoassets through mining, lending, employment, staking, or as payment for goods or services, your income may be subject to Income Tax. The tax treatment depends on the nature of the activity and your circumstances.
When Does Capital Gains Tax Apply?
As mentioned above, CGT applies when you dispose of cryptoassets such as Bitcoin. HM Revenue and Customs (HMRC) considers the following actions to be disposals:
- Selling them for cash
- Exchanging one cryptoasset for a different type
- Using them to pay for goods or services
- Giving them to another person (unless it’s a gift to your spouse, civil partner, or charity)
Do I Have to Pay CGT If I Buy or Hold a Bitcoin?
Simply buying and holding Bitcoin does not create a tax liability. You pay CGT on Bitcoin profits. Buying and holding Bitcoins does not create a tax liability. You only pay cryptocurrency tax when a taxable disposal occurs. For instance, you buy Bitcoin for £10,000 and sell it for £20,000. Your profit is £10,000. If your total gains are more than the annual Capital Gain Tax-Free Allowance, you need to pay tax on the amount above the threshold.
How to Calculate Crypto Capital Gain Tax?
If you hold cryptoassets as an investment, you may pay CGT on your net capital gains for the tax year. Before calculating CGT, first calculate the capital gain. You can calculate it using the formula:
Capital Gain = Disposal proceeds − allowable acquisition costs − allowable transaction costs
If your gains are less than the tax-free allowance, you do not have to pay tax. However, if it exceeds the allowance, you calculate tax on the remaining taxable gain and pay CGT on Bitcoin profits.
How HMRC Calculates Bitcoin Capital Gains?
Rather than tracking individual coins, HMRC calculates Bitcoin CGT by using a specialised matching process. HMRC has three rules to decide which purchase matches your sale.
Same-day Acquisition
If a person buys and sells Bitcoin on the same day, those transactions are matched first.
30-day Rule
If a person buys Bitcoin again within 30 days after selling it, the sale is matched with that new purchase.
Section 104 Pool
If neither of the above applies, the Section 104 Pool is used, where the sale is matched with the average cost of all the Bitcoin you already own.
Do I Need to Report Bitcoin Gains to HMRC?
Yes, if your cryptocurrency disposals generate gains exceeding the annual allowance, you may need to declare them to HMRC through a Self Assessment tax return. Since Bitcoin has gained popularity, HMRC has increased its focus on cryptocurrency compliance. It receives information from some UK crypto exchanges and financial institutions. Therefore, you must report your taxable gains to HMRC.
How Do I Report Crypto Tax to HMRC?
To understand how to pay CGT on Bitcoin profits, you first need to report your crypto disposals to HMRC. You can report your crypto capital gains tax through HMRC’s Self Assessment.
Register for Self Assessment
If you are not already in Self Assessment, the first step is to register for Self Assessment if you have capital gains above the annual allowance and earn crypto income. After registration, you will receive a Unique Taxpayer Reference (UTR).
Keep Your Crypto Records
Keeping accurate records is essential to report and pay CGT on Bitcoin profits. HMRC expects detailed records of the dates of each transaction, GBP value at the time of transaction, type of transaction, fees paid, and wallet/exchange records.
Complete the Self Assessment Tax Return
The next step is to complete the self-assessment by filling in the Capital Gains Summary pages, reporting all gains or losses, including cryptoassets.
Use the SA108 supplementary pages to report your total capital gains and the main SA100 tax return to report your crypto income. Enter the GBP value of any earned or mined crypto in the relevant income boxes on this main form.
Note: you must keep transaction details and provide them when HMRC requests them.
Submit Your Return
Submit your return by 31 January (online filing). You must pay CGT on Bitcoin profits, if any, due by the same deadline. Before paying tax, you must calculate your tax liability correctly.
How Do I Pay CGT on Bitcoin Profits?
In the UK, you mostly pay CGT on taxable gains through Self Assessment. You can pay your crypto gains tax as follows:
- Keep detailed records of all transactions
- Calculate your CGT on profit, not total value. Check if you need to pay CGT on gains you made by selling, exchanging, or giving away cryptoasset tokens
- Report your CGT for disposals, such as selling or spending crypto, and Income Tax for earnings like staking or mining rewards.
- Submit your tax returns by 31 January. Once your return has been submitted, you are responsible for paying the tax due by the applicable deadline.
- Pay your taxes. If you reported your CGT using real-time service, you can use the HMRC online service to pay your taxes online. You can pay through bank transfer, debit card, or direct debit.
When to Pay CGT on Bitcoin Profits?
Generally, you must pay the tax you owe on your cryptoassets within 30 days of making your disclosure. Failing to pay the amount can lead to a penalty, interest, or both. Additionally, if the deadline is on a weekend or bank holiday, your payments should reach HMRC by the end of the previous working day.
What Do I Need to Pay Tax on Bitcoin Profits?
To pay tax on taxable gains, you need your 14-character reference number. You can find your reference number on the letter HMRC sent you after you made your disclosure. Using an incorrect number may delay your payment.
For more details about when and how to pay CGT on Bitcoin profits, visit the official HMRC website.
How to Reduce Crypto Tax Legally?
Many people wonder how to avoid paying tax on crypto, right? In the UK, you must pay the tax you owe. Failing to pay tax may lead to hefty HMRC penalties. However, you can legally reduce your tax liability through utilising tax-loss harvesting, donating to charity, or transferring cryptoassets to your spouse or civil partner.
Offset Capital Losses
If selling investments has brought you no value but loss, you can use those losses against your capital gains.
Gift Assets to a Spouse
You usually do not pay CGT on crypto when you gift your crypto assets to your spouse or civil partner. However, if they dispose of the assets later, they may have to pay CGT on Bitcoin profits. Additionally, if you separate and don’t live together at all, you may have to pay tax on profits.
Transfer to Charity
You can also reduce your tax liability legally by transferring the crypto assets to a UK-registered charity.
Use Your Annual CGT Allowance
Another legal way to reduce your tax liability is to use the yearly Capital Gains Tax allowance. Your profits within this allowance may not be taxable.
What Records Should You Keep?
To pay CGT on Bitcoin Profits, you must keep the required documents, which are:
- Wallet addresses
- Exchange statements
- Transaction IDs
- GBP values
- Fees
What Happens If You Don’t Report Crypto?
If you don’t report crypto to HMRC, it can lead to hefty penalties, interest, or both. If you intentionally avoid reporting or paying the tax, HMRC can launch investigations.
Speak to an Expert
Get in touch with our skilled professionals for expert UK tax and accounting solutions specialised to minimise your tax burden and resolve your financial challenges efficiently.
The Bottom Line
Paying tax on Bitcoin profits is an important responsibility for UK cryptocurrency investors. You can earn a lot from investing in crypto, but profits from selling, exchanging, or spending cryptocurrency may trigger taxes. You must understand how and when to pay CGT on Bitcoin profits to avoid penalties. Failing to meet the deadline or filing inaccurate tax returns can cost you penalties, interest, or both.
It is best to seek expert help to manage your finances more effectively and make informed investment decisions. If you need an accountant to handle your complex cryptocurrency transactions, use our platform, AccountingFirms. We help you find the best accountant near you within just minutes.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.
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