Want to know how to avoid paying tax on cryptocurrency in the UK? There are ways to strategically - and legally - avoid your crypto taxes while keeping HMRC off your back. But there are big changes coming to UK tax breaks and your cut-off date to optimise your taxes is April 5th, so act fast to slash your crypto tax bill now ahead of the EOFY!
How to pay less tax on cryptocurrency in the UK
- Take advantage of tax-free thresholds
- Harvest your losses (and offset your gains)
- Use the trading and property tax break
- Invest crypto into a pension fund
- Make a crypto donation
- Gift crypto to your significant other
- Invest in an EIS or SITR
- Use Koinly to spot unrealised losses
Take advantage of tax-free thresholds before they're gone!
HMRC is pretty generous when it comes to tax-free thresholds compared to other countries!
As a UK resident, you only have to pay Capital Gains Tax on your gains above your tax-free allowance of £12,300 (the Annual Exempt Amount).
A word of warning though, the Annual Exempt Amount is being halved to £6,000 for the 2023-2024 tax year and halved again to $3,000 for the 2024-2025 tax year. So make the most of the higher Annual Exempt Amount ahead of the end of the 2022-2023 financial year while you still can.
In addition to the CGT allowance, most crypto taxpayers in the UK can make use of the standard Personal Allowance is £12,570, which is tax-free income. Only those earning more than £125,140 do not receive a personal allowance and your allowance is reduced if you earn more than £100,000.
Harvest your losses (and offset your gains)
You only ‘realise’ a capital loss when you sell, trade, spend or gift your crypto. But before that point, if the price of your crypto has decreased since you bought it, you’ll have unrealised losses. If you know you’re facing a large tax bill and you’ve got some duds in your portfolio - it can be beneficial (from a tax perspective) to harvest them by selling at a loss. This is also known as tax loss harvesting.
It’s important to note wash sales are not permitted by HMRC. Wash sales involve selling for a loss before immediately repurchasing the same token - creating an artificial loss in the process.
You can use a crypto portfolio tracker (like Koinly) to track these unrealised losses throughout the financial year and later harvest and offset against your gains ahead of the end of the financial year to minimise your taxes.
Use the trading and property tax break
If you earn less than £1,000 in income from crypto or other means, you don't need to declare it to HMRC. Every UK taxpayer gets a tax-free allowance of £1,000 on trading and property. You’ll have a £2,000 allowance if you're investing in both. Tax-free thresholds are an easy way to pay less crypto tax, especially if you only have small amounts invested.
Invest crypto into a pension fund
Wondering if you can hold cryptocurrency investments in a SIPP or ISA? Will crypto invested in a pension fund bring you welcome tax relief? In the UK, it's a possibility - although it's not necessarily a straightforward process and is something to check with your financial advisor.
Make a crypto donation
Yes, your cryptocurrency donations are tax deductible in the UK! If you don’t need all of the profit from your crypto investment, you can lower your capital gains tax burden by donating some of your crypto to charity. You’ll get a deduction worth the full value of your crypto, including any capital gains - provided the charity is registered, and the donation is not made to someone connected to the donor, set to receive a financial advantage directly or indirectly from the charity.
Gift crypto to your significant other
Coupled up? Transfers between spouses in the UK are currently exempt from CGT under a tax-free gift loophole.
This means that the ownership of assets can be transferred between partners so that both of your annual CGT allowances can be combined and used against gains. This effectively doubles the CGT allowance for married couples and civil partners to £24,600 (until April 2023). As per HMRC, to use this benefit, you can't be separated or live apart from each other.
The transfer is said to occur at 'no gain, no loss' because the recipient inherits the base cost of the asset being transferred.
Even if you’re over the CGT allowance if your partner is in a lower Income Tax band than you are, gifting crypto to allow them to make the disposal may still benefit you as they may be in a lower Capital Gains Tax band.
Invest in an EIS or SITR
Another tax loophole in order to pay less tax on your crypto in the UK is by deferring a portion of your crypto tax bill by investing in one of two government schemes. Gains made on investments 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
It's unlikely you'll be able to spot all crypto tax-reducing opportunities, especially if you don't know how your portfolio is looking. HMRC recommends that crypto investors use a crypto tax calculator like Koinly to pay the right amount at tax time. But crypto tax software is just as good at helping you to pay less crypto tax - especially when you use it strategically.
For example, say you've got a high Capital Gains Tax bill on the horizon. Jump into your portfolio dashboard on Koinly and look at your unrealised crypto losses.
Following the recent bear market, you may have crypto holdings that are underperforming or sitting at a loss. In situations where you realise losses (by selling), these losses can be offset against your capital gains to reduce your tax liability - and Koinly makes this easy.
The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial or taxation adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.