How to Avoid Crypto Tax in the UK (Legally!)

Have you ever wondered how to avoid paying tax on crypto in the UK?

Trying to avoid HMRC isn’t the best approach, but you can strategically – and legally – use methods to save your hard-earned money.

In this guide, we’ll talk through ways you can slash your crypto tax bill to help you optimise ahead of the financial year (EOFY) and the 5th of April cut-off date.

Tax avoidance vs evasions: What’s the difference?

There’s a fine line between avoiding tax and evading tax, and the differences are mostly based on legalities.

• Tax avoidance: ‘Bending of the rules’ so that you pay as little tax as legally possible. Think: Setting up a business in an offshore tax haven or making a charitable donation to reduce your capital gains.

• Tax evasion: Taking illegal routes to avoid paying tax altogether. This includes activities such as concealing information about your financial situation from HMRC or operating a business off the books.

Avoidance can be morally grey, and if you are seen to be abusing these exemptions, you may be investigated or fined. This also means you’ll lose any of the tax advantages you were trying to create.

The penalties for not reporting crypto to HMRC are much more substantial: Bigger fines, criminal prosecution, and potentially prison time.

How to avoid tax on cryptocurrency in the UK

Let’s be clear: there’s no legal way to avoid crypto tax. HMRC guidance on crypto taxes is clear: it's subject to Capital Gains Tax (GCT) and/or Income Tax.

However, there are smart strategies to minimise your tax bill. Let’s dive in.

Take advantage of tax-free thresholds

As a UK resident, you only have to pay Capital Gains Tax on your gains above your tax-free allowance of £3,000 (the Annual Exempt Amount).

In addition to your CGT allowance, you can make use of the standard Personal Allowance, which is £12,570 of tax-free income.

There are only two exceptions here:

• If you earn more than £100,000, your allowance is reduced.

• If you earn more than £125,140, you do not receive a personal allowance.

Harvest your losses (and offset your gains)

You only ‘realise’ a capital loss when you sell, trade, spend, or gift your crypto. If you’re just sitting on a dud coin that’s down in value, it’s an unrealised loss.

It could actually be beneficial (from a tax perspective) to harvest them by selling at a loss, also known as tax loss harvesting.

Make sure you’re not falling into a wash sales trap (selling for a loss and then immediately repurchasing the same token ). This creates an artificial loss, which HMRC does not permit.

Use a crypto portfolio tracker (like Koinly) to track your unrealised losses throughout the financial year and later harvest and offset against your gains ahead of the end of the financial year (5th April) to minimise your taxes.

Use the trading and property tax break

Every UK taxpayer gets a tax-free allowance of £1,000 on trading and property. That means, if you earn less than £1,000 in income from crypto or other means, you don’t need to declare it to HMRC.

If you’re investing in trading and property, you get a £2,000 allowance.

So, if you’re only earning a small amount of income (including from crypto), you’re instantly avoiding any tax.

Invest crypto into a pension fund

It is possible to find some tax relief by holding cryptocurrency in a SIPP or ISA.

However, it’s not as straightforward as that in the UK yet.

It’s best if you check with your financial advisor first, as there are additional rules.

Make a crypto donation

Being a good Samaritan helps! Your crypto donations are tax-deductible in the UK.

If you don’t need all of the profit from your crypto investment and you’re looking for some good karma, you can lower your capital gains tax by donating some of your crypto to charity.

You’ll get a deduction worth the full market value of your crypto. Just make sure:

• The charity is registered.

• The donation is not made to someone connected to the charity who is set to receive a financial advantage directly or indirectly from the charity.

Gift crypto to your significant other

Along the same lines, transfers between spouses are currently exempt from CGT in the UK through a tax-free gift loophole.

This means ownership of your assets can be transferred between partners, and both of your annual CGT allowances can be combined and used against gains.

You’re effectively doubling the CGT allowance for married couples and civil partners to £6,000 a year! Just as long as you live together. As per HMRC, you can't use this benefit if you're separated or live apart from each other.

This works because the transfer is said to occur at ‘no gain, no loss’, meaning the recipient inherits the base cost of the asset being transferred.

Even if you’re over the CGT allowance and your partner is in a lower Income Tax band than you are, gifting crypto to allow them to make the disposal can still benefit you, as they may also be in a lower Capital Gains Tax band.

Invest in an EIS or SITR

If you invest in one of two Government schemes, you may defer some of your CGT.

Gains made on investment in an Enterprise Investment Scheme (EIS) and Social Investment Tax Relief (SITR) are free from CGT if held for three or more years.

Use a crypto tax calculator to spot unrealised losses

Let’s be honest, doing your taxes alone is hard at the best of times, and it’s unlikely you’re going to be able to spot all crypto tax-reducing opportunities – especially if you don’t know how your portfolio is looking.

Even HMRC recommends that crypto investors use a crypto tax calculator, like Koinly, to pay the correct amount.

This crypto tax software is just as good at helping you pay less crypto tax if you’re using it strategically.

In the current market, it's likely you and everyone else have crypto holdings that are underperforming or sitting at a loss. Koinly makes it easy to realise your losses, so you can offset your gains by selling and reduce your tax liability.