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Can you cash out crypto tax-free?

We've updated this guide on 14th April 2021

If you make a profit from trading Bitcoin, Litecoin, Ethereum, or any other cryptocurrency, then you might want to know if you can cash out crypto tax-free. Crypto trading is becoming more and more popular, especially with younger traders who are keen to start their first investment portfolios. 

However, although these crypto assets have the potential to make you lots of money, it doesn’t mean that they’re not subject to tax. HMRC might not deem crypto to be actual money, but they still see it as a type of personal investment. Like property or shares, any profits you make from buying or selling crypto is taxable.

What is crypto?

Crypto, or cryptocurrency, is a form of digital asset that can be used online for the exchange of goods and services. 

There are more than 6,700 different cryptocurrencies that are being traded publicly. Some of the most popular types of crypto include:

  • Bitcoin
  • Litecoin
  • Tether
  • Cardano
  • Bitcoin Cash
  • Ethereum
  • Zcash
  • Stella Lumen

Why is crypto becoming so popular to trade? 

  • Crypto is believed to be the currency of the future. Many people are investing in them, and buying and selling different types for profit. Some are buying them now before they become more valuable. 
  • Most cryptocurrencies remove the central banking element from managing money supplies. Over time, banks usually reduce the value of money via inflation. This doesn’t happen with crypto.
  • It’s more secure. Crypto uses a technology called blockchain, which is a decentralised processing and recording system that is thought to be more secure than traditional payment methods.
  • Some people are using crypto as a way to move money more cheaply and easily.

Because of these reasons, the value and potential of crypto is increasing. As a result, more and more traders are looking to invest in crypto to make profits and increase their investment portfolios.

Why can you not cash out crypto tax-free?

At different points in its thirteen year history, crypto has fluctuated in value. For example, anyone who bought Bitcoin in 2008 when it was worth fractions of a pound could potentially have made hundreds of millions of pounds in profit in 2021 when its value hit around £40,000. 

Crypto trading has a reputation of being like gambling, but unlike gambling, you’ll most likely be liable to pay tax on your profits.

If you hold crypto as a personal investment, you’re liable to pay Capital Gains Tax on any profit you make from them. You’ll only pay CGT on the profit above your Capital Gains Tax allowance, which is £12,300 for the 2021/22 tax year.

If your crypto profits exceed the Capital Gains Tax allowance, you’ll have to pay tax at the following rates:

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 happens if I don’t declare my crypto profits to HMRC?

You might be surprised to know that the penalties for not declaring your crypto profits can be very severe!

The UK was actually one of the first countries to introduce tax on crypto assets. HMRC is very active in tracking down cryptocurrency tax avoiders, and they’ve even started working with crypto platforms to do this. Coinbase recently handed over information on UK customers who made more than £5000 worth of cryptocurrency between 2017 and 2019 to HMRC. 

It’s important to understand that HMRC will not stop its pursuit in finding crypto tax avoiders, so it’s best to be proactive and report and pay your tax in time to avoid any late penalties and further prosecution.

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