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Can I Avoid or Reduce Income Tax on Bitcoin and Cryptocurrency?
Governments are increasingly scrutinising the financial affairs of cryptocurrency investors as they try to work out how to tax this ‘new money’.
In the UK, HMRC is proactively writing to people who’ve bought £3,000 or more of Bitcoin or cryptocurrency to remind them that they may be liable for tax on their earnings.
This might be Capital Gains Tax (CGT) if it’s a one off transaction, or, if you’re a high frequency trader, you may be liable for Income Tax.
But the rules are complex so here we take a closer look at whether you have to pay Income Tax on your digital asset transactions.
We’ll also examine how to avoid Income Tax on Bitcoin and cryptocurrency and how you can reduce how much you have to pay.
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What is Income Tax?
Income Tax applies to the tax you pay on your earnings from you job, freelance employment if you’re self-employed or regular income from other sources.
The amount of Income Tax you pay varies depending on how much you earn after your personal allowance and other tax-free deductions are made.
Other regular income that you might have to pay Income Tax on includes your pension, rental income, state benefits and even interest earned on your savings.
Do I have to pay Income Tax on my Bitcoin and cryptocurrency earnings?
The short answer is yes, you will have to pay Income Tax on your crypto earnings if they occur on a frequent basis, or are part of a fixed, regular remuneration package.
Most people who own crypto are HODLers, ie holding their investment over the long term in the hope it appreciates.
When they come to sell their crypto it’s Capital Gains Tax that will apply if they make a profit over their annual allowance.
However, there are a number of situations where you’ll need to pay Income Tax, together with National Insurance on your cryptoassets.
These include:
- If you receive your salary from your employer either partially or wholly in crypto.
- You earn a regular income from trading Bitcoin and other cryptos on a high frequency basis, rather than occasional transactions.
- You receive a regular crypto income from cryptocurrency mining activities.
- Staking crypto to earn tokens sometimes falls under the Income Tax rules, but not always.
- Receiving regular referral payments by promoting or recommending crypto services or platforms, such as Coinbase.
- If you regularly engage in DeFi (Decentralised Finance) transactions or pay-to-earn games.
- Receiving airdrops whereby you receive free tokens from a crypto project (in some circumstances).
- If you earn tokens through yield farming or participating in liquidity pools.
- If you lend your cryptocurrency through platforms such as Nexo and earn interest as a result.
- Engage in other crypto activities such as shop to earn, surveys that pay in Bitcoin, browse to earn, Bitcoin faucets and similar platforms.
How to avoid Income Tax on Bitcoin and cryptocurrency
There are certain things you can legally do to reduce Income Tax on your Bitcoin and cryptocurrency activities.
Firstly, you need to factor in your annual allowance whereby a certain amount of your income is tax free each year.
This should be deducted when working out which tax band you’re in, ie the overall amount you earn each year, and helps offset tax on your earnings.
You can also offset any losses you make during your crypto activities against potential future profits that may arise.
Under certain circumstances it’s also possible to carry forward these losses to future years – useful if your crypto profits come at a later stage.
You can also save a small amount of Income Tax by using the marriage allowance which allows you to transfer £1,260 (at the time of writing) of your personal allowance to your spouse or civil partner. This in turn cuts their tax bill by £252 for the tax year.
For this to work, one of you has to be a low earner with income that falls below the annual tax-free allowance (£12,570 at the time of writing).
To summarise, you can reduce your crypto Income Tax liability by:
- Deduct your annual allowance from your overall annual earnings.
- Offsetting any losses, and carrying them over to future years.
- Transfer a portion of your personal allowance to your spouse or civil partner.
How to I pay Income Tax on my crypto earnings?
If your financial gains from crypto are considered income rather than a disposal, you need to fill in a Self Assessment tax return to record your profits.
You’ll save yourself a lot of time and energy if you keep an accurate record of your crypto transactions as you go along.
The things you should record include:
- Transaction dates
- The cryptocurrency you sold
- What you paid for them
- How much you sold them for
- Wallet addresses
- Exchanges/platforms used
The above applies to individuals. The rules for businesses which have regular cryptocurrency transactions are different.
In either of these cases, if you’re not sure how you should record and report your earnings you should seek the advice of a specialist cryptocurrency accountant or use dedicated cryptocurrency accounts software or app.
Does HMRC know about crypto earnings?
Yes, HMRC has is tightening up its rules surrounding crypto earnings and shares trading data with the major Bitcoin exchanges used by UK clients.
Also, signing up to a mainstream crypto exchange now requires UK residents to go through Anti-Money Laundering checks as part of efforts to crack down on tax evasion, among other things.
Decentralised exchanges do not require you to submit this information, but at some stage you’ll probably want to convert your crypto to fiat and move it into your bank account.
Depending on the sums involved, this will send up a red flag and your transactions will be scrutinised so make sure you declare them for tax purposes to avoid falling foul of the law.
Conclusion
There are a few things you can do to reduce the amount of Income Tax you pay on your crypto earnings, but your options are limited.
HODLers are better off as reducing your Capital Gains Tax liability is much easier, as is your Inheritance Tax bill.
If you’re a regular crypto earner you should declare your earnings alongside any other income you receive to avoid a hefty fine or criminal prosecution further down the line.
For further guidance on the tax rules surrounding crypto in the UK see HMRC’s official guidance notes.
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Disclaimer: Nothing on this website constitutes financial advice. The information provided is for educational purposes only.
