Cryptocurrencies - How are they taxed?

To start with It is essential to keep good records so it’s possible to treat transactions correctly, errors here could mean overpaying tax. Here is HMRC’s guidance CRYPTO10400 - Cryptoassets Manual - HMRC internal manual - GOV.UK (www.gov.uk) 

The two Taxes to be aware of are Capital Gains Tax (CGT) and Income Tax, both are reported on your Self-Assessment Tax Return.

The tax will depend on the transaction involved. It is therefore essential to understand the nature of the transaction because errors in this could result in accidentally paying (or underpaying) a higher rate of tax. (CGT higher rate 20% and Income tax 40-45%).

Generally, cryptocurrency purchases and disposals are classified in a similar way to shares in that they are “pooled” into asset classes, and disposals are calculated from the pool. Day trading and “bed and breakfasting” apply to cryptocurrencies just like they do to traditional share dealing with the 30 day rule applying. Therefore the majority of transactions will be taxed under CGT. There are exceptions to be aware of though:

Common transactions:

Mining: Depending on the level of activity. This will generally be treated as income and will need to be shown as miscellaneous income on a tax return. 

Staking: Using an element of your holding to support the creation of the blockchain in return for reward. Rewards from Staking will need to be accounted for as miscellaneous income on a tax return. 

Salary or payment for work done: This will be treated as income at the market value of the asset on the day of the transaction and need to be accounted for as income on a tax return. 

Airdrops: When you receive the crypto asset as marketing, a prize or for publicity. You have done nothing in exchange for the asset. If this is the case they will join the Pool for CGT and be taxed on disposal. Forking: The splitting of the asset in two and the holder receives more assets at a lower individual value. These will be Pooled and be taxed on disposal.

HMRC Cryptoassets Manual  Cryptoassets Manual - HMRC internal manual - GOV.UK (www.gov.uk)