Crypto Tax: Am I an Investor or Trader?

Crypto tax talk: If you’re a CoinJar customer navigating cryptocurrency taxation in the UK, one of the first steps is determining whether HMRC classifies you as an investor or a trader.

This distinction is crucial because it directly impacts how your crypto activities are taxed.

Investor

An investor is someone who primarily engages in buying, selling, or holding cryptocurrencies as a personal investment tool. If this sounds like you, your income from crypto will typically come from:

-Capital gains (profits from selling or trading crypto)

-Staking rewards

-Forks, and

-Airdrops.

The majority of people interacting with cryptocurrencies fall into this category. As an investor, your crypto transactions are subject to Capital Gains Tax (CGT) whenever you sell, trade, or give away your digital assets.

Trader

On the other hand, a trader is someone whose primary source of income comes from frequent and substantial cryptocurrency trading. Unlike investors, traders are not assessed on individual capital gains events. Instead, their profits are treated as personal income and are subject to Income Tax and National Insurance (NI) contributions.

However, becoming a trader isn’t as simple as trading crypto regularly. HMRC sets a high bar for this classification. You’d need to demonstrate that your trading activities resemble running a professional, one-person financial operation. If you’re unsure about your status, it’s safe to assume you’re likely classified as an investor unless HMRC explicitly states otherwise.

For more detailed guidance on what constitutes a trader, visit HMRC’s official resources or consult a tax professional.

What is Capital Gains Tax (CGT)?

Since most crypto users are classified as investors, understanding Capital Gains Tax (CGT) is a good idea. HMRC treats cryptocurrencies as assets, similar to stocks or property. This means every time you sell, trade, or even gift your crypto, you’ll need to assess whether you’ve made a capital gain or loss.

When does CGT apply?

A capital gains event only occurs when you take action with your crypto, such as selling it or exchanging it for another asset. Simply holding (or “HODLing”) your crypto without making any transactions does not trigger a taxable event, even if its value fluctuates significantly.

How are capital gains calculated?

Your capital gain is the difference between the price you paid for the crypto and the price you sold it for.

For example:

-You buy 1 Bitcoin for £70,000.

-Six months later, you sell it for £100,000.

-Your capital gain is £30,000 (£100,000 - £70,000).

You’ll need to pay tax on this gain, but certain costs can reduce your taxable amount.

Allowable costs: Reducing your tax liability

HMRC allows you to deduct allowable costs from your capital gains. These include:

-Transaction fees charged by exchanges

-Network fees required to process blockchain transactions

-Professional fees related to the sale (e.g., legal or advisory services).

For instance, if you paid £50 in transaction fees to sell your Bitcoin, your capital gain would be reduced to £29,950 (£30,000 - £50).

Pooling your crypto assets: Simplifying cost basis

If you’ve purchased the same cryptocurrency multiple times at different prices, HMRC allows you to calculate an average cost basis by pooling your acquisition costs. Here’s how it works using a fictional coin called BaoBun:

-You buy 1 BaoBun in 2017 for £3,000.

-In 2019, you buy another BaoBun for £7,000.

-Your pooled cost basis is now £5,000 per BaoBun (£10,000 total cost ÷ 2 BaoBunsBitcoins).

If you later sell one BaoBun for £9,000, your capital gain is £4,000 (£9,000 - £5,000 pooled cost).

Capital losses: Offsetting your gains

If the value of your cryptocurrency decreases between the time you bought and sold it, you’ve incurred a capital loss. For example:

-You buy 1 BaoBun for £7,000.

-Later, you sell it for £4,000.

-Your capital loss is £3,000.

Capital losses can be used to offset capital gains in the same financial year or carried forward for up to four years. For instance:

-If you make a £5,000 gain on one trade and a £3,000 loss on another, your net gain is £2,000 (£5,000 - £3,000).

Keep in mind that capital losses cannot be used to offset income from work or other non-crypto sources, it only applies to capital gains income.

Negligible value claims: Dealing with worthless tokens

In the volatile world of crypto, it’s not uncommon to hold tokens that eventually become worthless. If this happens, you can file a negligible value claim with HMRC. This allows you to

as though you sold it for £0, enabling you to claim a capital loss equal to your pooled purchase price.

For example:

-You bought a token for £500, but its value has dropped to zero.

-By filing a negligible value claim, you can record a £500 capital loss.

It’s important to note that assets must have lost value while you owned them. They cannot have been worthless at the time of purchase. Additionally, timing matters: losses must be claimed in the correct tax year and cannot be carried back to previous years.

Crypto tax calculators

There are now crypto tax calculators that can track all of your trades. This will save you a lot of work.

Many of the crypto calculator companies give CoinJar customers a discount that we can pass on to you. Check this page for more details.

Are you a trader or investor?

Navigating cryptocurrency taxation in the UK as a CoinJar customer boils down to understanding whether HMRC views you as an investor or a trader. This is a distinction that shapes how your crypto activities are taxed.

For most users, the investor classification applies, subjecting their transactions to Capital Gains Tax (CGT) on profits from selling, trading, or gifting crypto, as well as income from staking, forks, and airdrops.

CGT only kicks in when you act on your assets, not when you simply hold them. Investors benefit from tools like allowable costs, asset pooling, and capital loss offsets to manage their tax liability, while niche options like negligible value claims offer relief for worthless tokens.

Traders, however, face a higher bar, with their profits taxed as income under stricter HMRC criteria, reserved for those operating at a near-professional level.