Tax revenue is an important part of any government’s budget, and it’s essential that taxes are collected fairly and efficiently. Unfortunately, a global economic system moving toward decentralized currencies can pose a risk to tax revenue collection.
This is because decentralized crypto assets are not subject to government control or inspection. As a result, white collar crimes like tax evasion and money laundering have become easier and more widespread.
In this article, we explore how tax authorities ensure the protection of tax revenue amid fiscal decentralization and the current measures they have in place, especially for the UK.
In this article we will answer a few most common questions:
- What are the advantages of a decentralized currency?
- How does digital currency help the economy?
- Is a centralized or decentralized currency better?
- Do I pay tax on cryptocurrency UK?
- Can you avoid paying tax on cryptocurrency UK?
- Do you pay tax on digital currency?
- Can HMRC track crypto?
- How is crypto tax calculated UK?
Why Use Decentralized Currencies, to Begin With? 5 Key Reasons
- They Offer Better Security: Decentralized cryptocurrencies offer the best security, as any centralized organization does not control them. This means that there’s no risk of your coins being confiscated, hacked or stolen.
- Enable Faster and Cheaper Transactions: Bitcoin, Ethereum and other decentralized cryptocurrencies provide much faster and cheaper transactions than traditional banking. As a result, they’re ideal for micropayments and large transactions.
- Free From Bank’s Policies and Fees: Since decentralized cryptocurrencies are not subject to the policies and fees of a central bank, they are free from many of the fees, charges and taxes banks impose on their customers. Plus, banks can collapse or face failures which could result in loss of customer money. Decentralized finance doesn’t let this happen.
- Crypto Currency Use Can Even Help the Economy: The use of decentralized finance currencies like bitcoin can democratize how capital is raised. Small businesses can access a larger pool of investors to raise funds without involving banks and other central authorities, keeping most of the investment money for their business. For instance, many businesses raise funds by offering ICO (initial coin offering) on discord, skipping larger venture capitalists.
- Borderless Payments: Decentralized currencies can be used globally because foreign exchanges do not bind them. This means you can send your cryptocurrency to anyone in the world in minutes and not have to pay expensive fees and exchange rates.
How Are Economies Ensuring Tax Revenue Protection During Decentralized Finance?
As cryptocurrencies continue to gain popularity, more and more people are turning to them for their tax benefits. However, the IRS has released an official statement confirming that cryptocurrencies are now considered property, not currency, meaning there will be taxes. Similarly, Australia also considers cryptocurrency as an asset and not a ‘currency’ for tax purposes. And if we talk about the UK, then HMRC charges crypto tax similar to gains people get on other investments, meaning capital gains tax (CGT).
So, in conclusion, most of the big economies in the world (excluding China, as they’re still cracking down on crypto investors and miners) already have laws and rules in place for tax on CryptoAssets. However, due to fiscal decentralization, crypto assets are not visible to the authorities, so they have to rely on the taxpayers’ word on how many crypto assets they hold. That said, governments do have ways to track crypto assets. They can verify if a user is reporting the crypto assets and transactions correctly in case they get suspicious.
This can be done by asking the crypto exchanges to disclose your transaction information and verifying whether or not you are reporting the correct information.
When to Pay Taxes on Crypto Digital Currencies? – UK Crypto Tax Guide 2022
Before we crunch some numbers, let’s discuss when UK citizens have to pay tax on crypto assets:
- Mining and Validation: HMRC sees crypto mining in two ways. If you are a mining business that’s running a big crypto mining operation with various rigs in place, your mining income will be counted as trading profit. However, if you’re a small miner, let’s say, having a single machine where you mine bitcoins in your free time, you will be considered a hobbyist who will pay income tax on the gains.
- Getting Paid in Crypto: Irrespective of the cryptocurrency you’re paid in and from where you’re paid, there will be an income tax along with a national insurance contribution.
- Crypto Airdrops: If you receive airdrops without doing anything in return for the company, or if they are not a part of mining or trade, you don’t have to pay any tax on them. However, if you earn them as a reward for an action, you need to report them as income. Moreover, you may have to pay a capital gains tax when you sell your airdrop tokens.
- Crypto Buy and Sell: If you sell the crypto for more than you bought it, you may have to pay CGT on the profit. If you lose money via crypto trading, you can minimize your capital gains tax through this loss. You may also trigger capital gains tax when swapping cryptocurrencies because it involves selling the crypto. If you trade significant crypto amounts, you are then a trader in the eyes of HRMC. This may trigger income tax instead of capital gains tax.
- DeFi Taxes: This is where things get a little complicated because DeFi protocols are mostly different from each other. If you stake or lend tokens, HMRC may treat them as capital gains disposal. This is also true even if the tokens are still under your control. However, knowing the return when you lend or stake the tokens is revenue and not capital gain. On the other hand, if you receive payments from the DeFi protocol, then it might be considered income. This will trigger income tax. Furthermore, many other factors affect how UK tax laws treat DeFi, such as if you get returns as a one-time payment, it might fall under capital gain.
How is Cryptocurrency Taxation in The UK Calculated?
Tax on Cryptoassets Earning You Income:
If your crypto taxes fall under income taxes, then the rate ranges from 0% to 45%, where 0% is for those who get a Personal Allowance of up to £12,570. After this amount (from £12,571), the rate varies from 20% to 45%. That said, here are different tax bands, incomes and rates:
| Band | Taxable Income | Income Tax Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
Source: Income Tax Rates UK Government
Note: These rates are for England, Wales and Northern Ireland. For Scotland, there are two more bands; a 19% rate (starter) and a 21% rate (intermediate).
Besides this, you will also have to make a contribution to National Insurance. It charges amounts depending on whether you’re self-employed or employed and your earnings. The taxes for this range from 2% to 12%.
Tax on Cryptoassets Yielding Capital Gains:
If you are calculating the tax on capital gains, you are exempt from tax on the first £12,300 of profit. This is because it’s considered a Capital Gains tax-free allowance. If the amount left after that is within the basic income tax band, you will pay 10% CGT. If it’s above that (at the higher rate), you will pay 20% on that. (Source)
| Band | Taxable Income | Capital Gains Tax Rate |
| Basic rate | £12,571 to £50,270 | 10% |
| Higher rate | £50,271 to £150,000 | 20% |
| Additional rate | over £150,000 | 20% |
Can You Avoid Tax on Cryptoassets in the UK?
No! You can generally not avoid paying crypto taxes unless you’re willing to break the law, which we’re sure you’re not. You only go tax-free on airdrops, as mentioned above. Besides that, you must declare and pay income or capital gains taxes on your crypto assets.
Many people think that it’s crypto. After all, these are decentralized assets. How will the government know about them if I don’t declare them? But the thing is, HMRC can track crypto transactions and holdings in certain ways, especially if they are suspicious of the amount, income, and assets you declare.
They can do this by asking the crypto exchanges to share your transaction records which can easily give them access to your holdings. So we suggest never hiding any crypto assets and transactions from the government. Plus, they already have various benefits and allowances in place. So you won’t be paying much for your profits or income.
CryptoAssets – Parting Words
Despite being unregulated and decentralized, crypto assets have brought out the best in governments. This ensures that tax revenues stay safe in the future.
Thanks to these new blockchain technologies, a new era of financial freedom is also on the horizon. So it won’t be long before these decentralized systems become more entrenched within our regular financial system.
Seeing this, governments have already implemented various crypto-friendly tax measures. Plus, they have different allowances and benefits to attract more and more crypto enthusiasts into the taxing systems.
