How is my crypto taxed? Surprising answers for UK residents and non-doms

In the increasingly digital world we live in, HMRC are simultaneously trying to keep up with, and crack down on, new ways of avoiding tax. Of particular significance, is the rapidly expanding cryptocurrency market, often making headlines for mind-blowing returns (and losses). Recent estimates suggest there are over 10,000 cryptocurrencies available on exchanges worldwide – although the top 20 cryptocurrencies make up nearly 90% of the total market. These include Bitcoin (BTC), Ethereum (ETH), XRP and Elon Musk’s favourite – Dogecoin.  

UK investors should be mindful of the tax implications of owning such assets and understand their reporting obligations. Non-domiciled UK residents in particular, should pay close attention to how cryptocurrency rules infringe into the parameters of the remittance basis.  

How are Cryptocurrencies taxed?

There is a misconception that cryptocurrencies fall outside the scope of UK tax. In fact, crypto is treated in much the same way as stocks and shares – it is seen as a capital asset, and therefore subject to Capital Gains Tax.  

As with other capital assets, any gains arising on disposal, exchange or even transfer to another currency will be taxed at rates of 10% and 20%, with allowance given for the Annual Exempt amount (£12,300 for 2021/22). These capital disposals should be reported on an annual Self-Assessment tax return, provided the reporting limits are met. For 2021/22, any cumulative transactions where the proceeds exceed four times the annual exemption (i.e. £49,200), or where gains exceed the annual exemption, need to be reported on a Self-Assessment Tax return.   

Remittance Basis Taxpayers

A non-domiciled individual who is resident in the UK has the option to claim the remittance basis of taxation. Their overseas income and gains are only taxable in the UK at the point they are remitted, whilst UK income and gains are taxed as they arise. Long term residents must pay for this benefit by way of a remittance basis charge after the first seven years of residence, until they ultimately lose the benefit entirely once they have been resident for 15 out of the preceding 20 tax years – becoming ‘deemed domiciled’. 

It may come as a shock to remittance basis taxpayers therefore, that HMRC have effectively disallowed remittance basis claims in respect of Cryptocurrencies. HMRC confirmed in 2019 that Exchange Tokens, such as Bitcoin and Ethereum, are taxable on UK residents irrespective of where the private key or digital wallet is held. Exchange Tokens are therefore deemed to be located wherever the beneficial owner is resident, which means that UK residents will be taxed on their worldwide cryptocurrency holdings. Commentators have suggested that this may be due to the decentralised nature of the assets, which could make it difficult to determine the actual situs. Nevertheless, this does result in a quirk in the system.  

An individual investing wholly offshore in cryptoassets is deemed to remit the invested amounts immediately to the UK at the point of purchase. This could cause complex issues where untaxed mixed funds are used to purchase the assets, with remittance basis ordering rules coming into play.  Furthermore, any resulting gains on assets would be taxable to CGT in the UK. This is especially contentious, given remittance basis taxpayers forfeit their right to the CGT Annual Exemption.  

Individuals coming to the UK for a short period of time should be especially wary of these rules, to avoid accidental remittances.  

If you are a remittance basis user and are concerned that you may have made a taxable remittance in respect of your cryptocurrencies, or would like to discuss reporting your Crypto acquisitions or disposals, please contact Lynn Gracie, Lyndsey Russell or your usual AAB contact.

Find out more about AAB’s International Private Client Tax Team.