Crypto Regulations in the UK

The Evolution of Crypto Regulations in the UK

Regulators’ stance on virtual assets has gradually shifted from negative to neutral, aligning with the conservative mindset of the British:

1. In 2013, the HM Treasury published its first report on cryptocurrencies, stating they did not fall under the definition of “money” or “financial instruments.” The Financial Conduct Authority (FCA) was advised to start researching new digital assets.
2. In 2014, the FCA released an official statement that it does not regulate cryptocurrencies as they had not yet received legislative status. However, the agency was prepared to regulate activities related to cryptocurrencies.
3. In 2015, HM Revenue and Customs (HMRC) proposed a cryptocurrency taxation draft, which was only adopted in 2018 but contained many controversial norms.
4. In 2019, the FCA officials banned crypto derivatives for retail investors, issuing a warning about the risks of investing in virtual assets.
5. In 2020, the EU's 5th Anti-Money Laundering Directive came into force in the country. It mandated KYC and AML checks for all companies involved in transferring digital assets through a distributed ledger.

Since the legal foundations established by regulators did not cover all aspects of the crypto economy, Rishi Sunak, a prime minister favorable to digital assets, demanded that market participants be provided with clear and understandable rules as soon as possible.

In October 2023, the UK government published the final version of these rules, which included provisions not mentioned in previous documents (particularly about fiat-backed stablecoins, NFTs, and mining).This version was seen as the UK's response to the European crypto regulation MiCA, and most importantly, the state recognized any operations with cryptocurrencies as legal and regulated financial activities.

Following Rishi Sunak's vision, the government is now aiming to transform the UK into a “global crypto hub.”

Crypto Taxes in the UK

In the UK, both individuals and legal entities are obligated to pay taxes on profits generated from cryptocurrency activities. The introduction of the Cryptoasset Reporting Framework (CARF) is set to automate the flow of income information to HMRC from tax authorities in Europe, Asia, and America (currently undergoing closed testing for legal entities). Moreover, crypto exchanges operating within the local market already relay all transaction data directly to the agency.

Should a citizen fail to report their crypto earnings promptly, they will receive a notification from the tax authority within 30 days. As of January 1, 2024, HMRC has issued 8,000 letters warning of potential penalties.

Following the full implementation of CARF in 2026, these notifications will be dispatched automatically by the system.

Here's the breakdown of the current tax scheme for cryptocurrencies:

1. Capital Gains Tax (CGT). Legal entities face a 19% tax at the standard rate. Individuals, including miners and traders using their personal accounts, need to pay tax based on their net income, with rates as follows:

• 0% for income under £6,000
• 10% for income between £6,000 and £50,270
• 20% for income above £50,270

2. Income Tax. The amount varies depending on total income, residency status, and tax category (differences apply for Wales and Scotland, for instance), with prevalent rates being 20%, 40%, and 45%.
3. National Insurance contributions are set at 2% for individuals and 10% for legal entities.

Exemptions from taxes include:

• Holders (up until they sell their assets),
• Cryptocurrency purchasers using fiat money,
• Airdrop participants when “tokens received without doing anything in return”,
• Family members gifted with cryptocurrency.

New regulations also dictate that staking should be taxable, yet rewards in cryptocurrency are taxed only after the tokens obtained this way are sold.

The UK regulators have arguably created the most systematic and consistent regulatory framework among European bodies. While cryptocurrency income taxes in this jurisdiction are not lenient, they are governed by a clear and unambiguous system, devoid of contradictory rules or subjective interpretations.