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Are bitcoins tax-free?

We've updated this guide on 14th April 2021

If you’re thinking of investing in cryptocurrency then you might be asking yourself, ‘are bitcoins tax-free?’ 

The value of these types of cryptoassets has continued to grow significantly, and as a result, more and more people are looking to buy and sell them. If you’re one of the lucky few who invested in Bitcoin early, then you might think that any profits you make from trading them are tax-free. 

Unfortunately, you’re wrong!

Many people think of cryptocurrency profits as being similar to gambling or a lottery type win; which would make them not taxable in the eyes of HMRC. What many people do not realise is that this isn’t true. Like any form of asset, there are various different tax implications attached to selling/exchanging Bitcoin.

What is Bitcoin? 

Bitcoin is a form of cryptocurrency. It’s a token that’s completely virtual, but like pound sterling, it can be used as a payment for goods and services with some retailers.

Are bitcoins tax-free and if not, which tax will I pay?

HMRC have made it very clear that bitcoins and other types of cryptoassets are not tax-free, and are subject to tax like any other asset. However, although they are considered to be a form of digital currency, HMRC doesn’t recognise Bitcoin as “money”. Instead, it’s considered a type of personal investment, like property or shares. 

You’ll have to pay tax on your bitcoins if:

  1. You’ve sold/exchanged Bitcoin and made a profit. Any profit you make will be subject to Capital Gains Tax (CGT). You’ll only pay CGT on the profit above your Capital Gains Tax allowance. In the 2021/22 tax year, this CGT allowance is £12,300.
  1. You’ve received Bitcoin from your employer as a type of wage payment. These count as earnings in the eyes of HMRC. You’ll be required to pay Income Tax and National Insurance contributions based on the value of what you receive.
  1. You’re trading Bitcoin at a high frequency. This is because HMRC see it as a form of financial trade – you’re essentially making enough money to earn an income from it. In this instance you’ll have to pay Income Tax and National Insurance on the profits you make.

Do I need to tell HMRC about my Bitcoin profits?

Generally, the answer is yes. 

If you’re a UK tax resident and you make more than the Capital Gains Tax allowance, then you’ll need to inform HMRC. You do this by paying CGT through a self-assessment tax return. 

It’s important to disclose all information about your Bitcoin trading to HMRC, as if you don’t, it could result in a hefty fine! In the past few years there has been an increasing number of HMRC enquiries focussing on those who buy and sell crypto assets and who have not paid the correct tax.

You can work out how much Capital Gains Tax you need to pay using our CGT tax calculator below!

Where did you get profits?
Profits from capital gains
£
Annual income
£
Outside of capital gains
Select tax year
Profits after tax
£18,560
CGT
£1,440
Profits from selling shares
£20,000
Capital Gains Tax (CGT)
£1,440

First £12,300 are tax-free.

£1,000 taxed at 10%: £100

£6,700 taxed at 20%: £1,340

Your profits after tax
£18,560

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How your capital gains tax is calculated

Your total capital gains tax (CGT) owed depends on two main components:

  1. How much you earn in total
  2. What type of assets you sell

Your overall earnings determine how much of your capital gains are taxed at 10% or 20%.
Our capital gains tax rates guide explains this in more detail.

In your case where capital gains from shares were £20,000 and your total annual earnings were £69,000:

Capital gains tax (CGT) breakdown

You pay no CGT on the first £12,300 that you make

You pay £100 at 10% tax rate for the next £1,000 of your capital gains

You pay £1,340 at 20% tax rate on the remaining £6,700 of your capital gains

What if I’ve bought/sold bitcoins through my business?

If you run a business that’s carrying out various ‘activities’ with Bitcoin and/or other types of cryptoassets, then your company will have to pay tax on them. HMRC state that these activities include:

  • The buying and selling of Bitcoin
  • Exchanging Bitcoin for other assets (including other types of cryptoassets)
  • The ‘mining’ of Bitcoin
  • Providing goods or services in return for Bitcoin

The type of tax that your company will have to pay depends on who is involved in the business and the types of activities that it carries out. It’s likely that your company will be liable to pay one of the following types of tax:

  • Capital Gains Tax
  • Corporation Tax
  • Corporation Tax on Chargeable Gains
  • Income Tax 
  • National Insurance Contributions
  • Stamp Taxes
  • VAT

As for the actual amount of tax your company will pay, this depends on various factors, such as business income, expenditure, profits and gains. It’s important that you declare this to HMRC on a company tax return, or a Self Assessment tax return if you’re a sole trader.

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