Regular consumers in the United Kingdom can easily buy cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) via exchanges. However, the most important factor in investing in these digital assets is to ensure that they are not used to finance illicit activities like money laundering or terrorist financing.
The country’s premier financial regulator, the Financial Conduct Authority (FCA), assumed oversight of the industry’s operations. For this reason, all crypto exchanges in the UK need to be registered with the agency or token issuers should obtain e-licenses instead of an FCA registration to sell the tokens in the country. The FCA allows crypto trading platforms to operate under the Markets in Financial Instruments Directive II (MiFID II).
FCA Crypto Regulations
The agency checks the know-your-customer (KYC) information of customers who buy and sell crypto assets on exchanges. The KYC provides businesses with personally identifiable information such as IDs, date of birth, photo, and address of their users. The companies use the information at their disposal to verify the customer.
Crypto platforms also employ Customer Due Diligence (CDD) procedures, where the customers’ risks are determined, and precautions are taken according to the risk analysis. These measures are required to be carried out by the FCA to ensure that companies comply with the anti-money laundering and terrorism financing regulations in the crypto business.
Crypto Asset Taskforce
The UK government established the Crypto Asset Taskforce in 2018 intending to detect situations where cryptocurrencies need to be regulated. The task force has designated the use cases of crypto assets that fall within the scope of the regulatory environment.
As per its table, there are three ways in which crypto assets can be used within the UK:
- It can function as a decentralized tool to enable the trading of goods and services or facilitate regulated payment services
- Use it as an investment asset by holding and trading for direct exposure to the crypto market
- To support capital increase and creation of decentralized networks through Initial Coin Offerings (ICOs).
The Crypto Asset Taskforce requires cryptocurrency operators that use the asset as an exchange tool to comply with the Payment Services Regulations Act of 2017 (PSR). the criteria here is whether a particular cryptocurrency is considered a fiat fund. Meanwhile, direct investments in crypto assets only fall under the regulatory framework if they are considered security tokens.
Tax On Crypto Assets In The UK
The HM Revenue and Customs (HMRC) applies income tax on cryptocurrencies based on the earnings made by those engaging in trade. HMRC employs two separate tax systems for individuals and businesses involved in trading cryptocurrencies.
Cryptocurrencies are categorized as utility tokens, security tokens, and exchange tokens. As per the HMRC’s guideline, only exchange tokens fall under the UK’s tax regime.
According to a policy paper published in November 2019, the value of exchange tokens is based on their use as a medium of exchange or investment. Securities tokens are used as dividends in a crypto company or as a representation of a firm’s debt.
Utility tokens allow the owner to access specific products or services on a platform; such as a business issuing tokens and accepting them as a form of payment. Exchange tokens are crypto assets that are intended to be used purely as a payment method.
1. Capital Gains Tax (CGT)
Capital gains tax is applied when a crypto asset that has appreciated is disposed of in the following manner:
- Selling for fiat currency
- Trading for another cryptocurrency
- Spending it on goods and services
- Gifting cryptocurrency to someone other than a spouse or civil partner
The CGT rates are determined by the crypto investors’ overall income. If the person’s basic income comes up to 50,270 GBP, they will be taxed a 10% CGT, and if their annual income exceeds 50,270 GBP, they will be charged a 20% CGT.
2. Income Tax
Income from cryptocurrency-related activities is taxed similarly to traditional income. The categories include:
- Receiving payment in cryptocurrency for goods or services
- Rewards from staking crypto assets
- Rewards from mining crypto assets
- Airdrop tokens
UK’s income tax on crypto varies based on total taxable income. There is zero tax for those with an income of up to 12,570 GBP, 20% for income between 12,571 GBP and 50,270 GBP, 40% for income between 50,271 GBP and 125,140 GBP, and 45% for income over 125,140 GBP.
Crypto investors must report any income received in cryptocurrency at its pound sterling value at the time of receipt.
There are also special considerations that will exempt crypto users from paying tax. If the person is mining or staking crypto as a hobby rather than a business, their income will be treated as miscellaneous. However, it will be subject to regular trading profits taxation if their activity qualifies as a business activity due to organization and commerciality factors.
Meanwhile, capital losses from crypto transactions can be reported to offset gains. If the crypto is disposed of at a loss, then the person’s overall capital gains tax liability will be reduced.
How To Comply and Report?
Here are a few steps to make sure that you comply with HMRC regulations as a responsible crypto user:
- Register for self-assessment if you are involved in any crypto activity that falls under the tax bracket
- Complete the relevant tax forms: SA100 for income tax; SA108 for capital gains tax
- Submit the tax returns before January 31 following the end of the tax year.
Bottom Line
You must understand the rules specified above before engaging in cryptocurrency transactions or other related activities in the UK. This ensures compliance with government regulations and optimizes tax obligations as a responsible resident or citizen of the UK.
