Made money in cryptocurrencies? Don’t forget to pay your taxes – in sterling

Speculating on cryptocurrencies is akin to gambling in all but one respect, says Merryn Somerset Webb: you must pay tax on any gains, and you must pay it in sterling.

Cryptocurrency tokens
Whichever cryptocurrency you made your gains in, you have to pay tax in sterling
(Image credit: © Ulrich Baumgarten via Getty Images)

Is investing in cryptocurrencies the same as gambling? The obvious answer to that it yes, yes it definitely is.

How can we tell? Because it is entirely speculative: there is no history to compare today’s prices to; there is no baseline; there is no valuation metric to base your ideas of what the price should or shouldn’t be on; the prices are extremely volatile; and, of course, when you buy you risk losing everything.

Sounds like a bit of a gamble doesn’t it? So much so that if you win big or small you might think you will owe no tax. After all there is no tax due on gambling winnings in the UK (it was abolished in 2012 when Gordon Brown was concerned about competition from tax-free offshore betting). The gambling industry takes the tax hit in the form of various special levies instead.

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But there’s a problem. You might think you are gambling when you visit your Coinbase account (as do I); the government does not. There is no special levy on the cryptocurrency industry (it’s too hard – which is rather the point). So you have to pay tax.

HMRC wants “its share of the proceeds”, says Rebecca Aldridge of Balance Wealth Planning in the FT this week, something you might as well know this month rather than next (the self-assessment deadline is approaching and Aldridge reckons up to a third of her clients hold cryptocurrencies).

If you are working and being paid in crypto you have to pay income tax on it – in sterling on the equivalent sterling value on the day you are paid. That means that if you are not working PAYE (if you are your employer takes the admin hit) and if you want to be safe you need to change the appropriate amount of cryptocurrency into sterling on that day, too – you won’t be amused if, on 31 January of any one year bitcoin that was worth £40,000 on your last payday is only worth £20,000 on your tax payment day and you haven’t the sterling to pay your bill.

You also have to pay tax on your crypto if you sell it or swap it for anything – note that spending it is effectively swapping it for goods. Doing either of those things crystallises its value and instantly makes you liable for capital gains tax on any rise in price since you bought it.

It gets worse. If you mainly mine your own bitcoin you will find that you are charged income tax on it (at the point of sterling value on mining) and, in some exceptional cases when individuals “buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself”, trading profits could be considered income and taxed as such.

And that’s not the end of it. You might end up paying income tax and capital gains tax on your bitcoin. If you are paid in it and its value then rises, the rise in value will be considered a taxable gain.

All the detail is here.

Obviously, you can mitigate capital-gains tax liabilities in some ways – losses can offset gains, for example, and you can use your capital-gains tax allowance to sell your gains over time (should you manage to hang on to those gains…) tax free (everything gets the capital-gains tax allowance).

But nonetheless, even for crypto cynics such as me*, there is something mildly disappointing about knowing that the likes of bitcoin are, on the one hand new (ish), exciting and capable (maybe) of changing the way money works, and on the other subject to the same dreary tax rules as everything else. To say nothing of the same harsh penalties for those who don’t engage with their tax bill – payable, I’m afraid, in sterling.

*As John and I have often discussed on the Moneyweek podcast, we aren’t yet convinced by the crypto case, but I still hold small amounts of several as a hedge against being completely wrong.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.