In this guide, we’ll cover everything you need to know about HM Revenue and Customs (HMRC’s) guidance on cryptocurrency taxes. We’ll cover how different transactions are taxed, how you can save money on your tax bill, and how you can report your crypto transactions on your tax return.
The basics of cryptocurrency taxation and how much you’ll be paying in tax.
How to report your capital gains and income on your tax return.
How to calculate your tax bill in unique situations — such as if you bought the same cryptocurrency multiple times.
How transactions like mining, staking, and airdrops are taxed.
If you’re reading this guide, it’s likely that you’ve already dabbled with cryptocurrencies. We won’t do a deep dive on the fundamentals of crypto within this piece, but we will explain how the UK government views assets like Bitcoin and Ethereum.
In their policy paper, HMRC explains that crypto-assets (or ‘cryptocurrency’) are cryptographically secured digital representations of value or contractual rights that can be:
HMRC does not consider cryptocurrency to be currency or money. Under UK crypto tax rules, profits on cryptocurrency disposals are considered capital gains and are accordingly subject to capital gains taxes.
In the United Kingdom, cryptocurrency is subject to capital gains and income tax.
When you dispose of cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it. HMRC explains that disposals include:
Typically, you’ll recognize income when you earn cryptocurrencies. The following transactions are subject to income tax.
During the 2022-2023 tax year, UK taxpayers had a Capital Gains tax-free allowance of £12,600. Capital gain income above this allowance is subject to the following tax rates.
For example, if you earned £50,000 of income and had £13,000 of cryptocurrency capital gain, you’d subtract your allowance and pay 10% tax on £700 of capital gain.
In the 2023-2024 tax year, the tax-free allowance will drop to £6,000.
In recent years, the HMRC has taken steps to curb crypto tax evasion. The HMRC has requested and obtained customer data from major exchanges and sent ‘nudge’ letters to crypto investors to encourage them to pay capital gains and income tax.
Under HMRC rules, taxpayers who do not disclose gains could face a 20% capital gains tax plus any interest and penalties of up to 200% of any taxes due. Those found to have evaded the tax could also face criminal charges and jail time.
There’s no guarantee of what will or will not happen if you fail to file your cryptocurrency taxes with HMRC. However, it’s recommended to stay compliant by properly filing all of your capital gains and income.
If you haven’t been reporting your gains or losses in previous years, you can get everything in order by filing an amended self-assessment tax return.
While there’s no way to legally avoid your crypto taxes, there are strategies that you can use to reduce them.
Remember, your first £12,600 of capital gain is tax-free. It can be valuable to keep this number in mind when disposing of your cryptocurrency.
Your tax rate is determined by how much income you receive in a given year. As a result, disposing of your crypto in a low-income year can lead to a significantly reduced tax rate.
If you donate your crypto to a registered charity without receiving anything in return, you can deduct the full fair market value of your crypto. However, if the price of your cryptocurrency has increased since you originally received it, you will incur a capital gain upon your donation.
In the UK, the tax year starts on April 6th and ends on April 5th of the following year.
The deadline for submitting your tax return is different for paper and online submissions. For the 2022-2023 tax year, the paper deadline is October 31st, 2023 and the online deadline is January 31st, 2024.
As you can see, capital gains and losses calculations can quickly become tedious when there are a significant number of transactions to account for.
In addition, many cryptocurrency traders have been trading for long periods of time without keeping records of their trades. To properly calculate your capital gains and losses, you need to have records of the price in GBP for every crypto asset you traded or sold at the time of the sale.
This challenge is the reason why many cryptocurrency traders are turning to cryptocurrency tax software to automate the entire capital gains and losses reporting process.
Due to the transferable nature of cryptocurrencies, exchanges don’t typically know the cost basis of your assets. This prevents them from being able to give you complete gains and losses reports.
To illustrate this further, let’s look at an example.
In this example, Coinsmart has no way of knowing Mark’s cost basis of his 1 BTC. Coinsmart only can see Mark trading his Bitcoin for Ethereum. They have no idea when, for how much, or where that BTC was originally acquired.
Because of this, Coinsmart can’t possibly tell Mark what the capital gain or loss was on his BTC trade for ETH. It’s missing an essential piece of the equation: cost basis. As a result, the platform can’t calculate his capital gains and losses.
This example demonstrates this problem at a small scale. Transfers happen all of the time, and it’s the transferability of crypto that makes it difficult for cryptocurrency exchanges to report capital gains and losses on your behalf. The reporting burden falls to you as the taxpayer.
To summarise, the second you transfer crypto into or off of your cryptocurrency exchange, the exchange loses the ability to report on your gains and losses. Exchanges like Coinbase even explain this to users:
To report your crypto transactions and pay your capital gains tax, you can use the HMRC’s Government Gateway online service. Here, you’ll be able to fill out a Self Assessment Tax Return and a Capital Gains Tax Summary.
Keep in mind, the HMRC requires you to keep records of all of your cryptocurrency transactions for at least a year after the Self Assessment deadline.
Looking for an easy way to generate a comprehensive crypto tax report with records of all of your transactions? Crypto tax software can help you accurately track and report all your crypto activity across multiple wallets and exchanges.
This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.
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To calculate your gains and losses from cryptocurrency disposals, you can use the following formula:
Fair Market Value is the market price of the cryptocurrency at the time you sold, traded, or disposed of it. Cost Basis refers to the amount it costs you to acquire the coin. The UK uses a system of pooling together the cost basis of acquired tokens, where each type of token has a pooled allowable cost that’s shared among assets in the pool.
Calculating capital gains and losses from your crypto transactions becomes more complex when you have multiple transactions to account for. The UK requires a specific type of method for calculating the cost basis of your coins known as Shared Pool Accounting.
With the shared pooled accounting method, you are essentially taking an average of the costs you have incurred to acquire your crypto. These averages can be used to calculate your cost basis per coin. Each cryptocurrency has its own shared pool for determining basis.
Let’s take an example of a crypto investor who buys Ethereum at multiple price points in a given year.
In this example, Emma has a total pool of 2.5 ETH prior to her October sale. To calculate her cost basis on a per ETH basis, we need to average out her total costs.
Her allowable costs for her total pool of 2.5 ETH are £4,000 (May buy of £1,500 plus August buy of £2,500). We then simply divide her total allowable costs by her total pool of ETH.
As you can see, Emma’s cost basis per ETH in her shared pool is £1,600.
We can use the equation from above to calculate Emma’s capital gain from the sale of her 1 ETH in October.
Emma recognizes a £1,400 capital gain from selling her 1 ETH in December.
In the United Kingdom, capital losses can be used to offset your capital gains for the year. If you have a net loss for the year, it can be carried forward into future tax years.
As a result, claiming capital losses can significantly reduce your tax liability, and even bring your total taxable gains below the tax-free allowance amount of £12,600.
However, it’s important to remember that the Same Day Rule and the Bed & Breakfast Rule prevent investors from claiming losses solely for tax purposes.
There are two additional rules that apply to crypto disposals in the UK: the Same Day Rule and the Bed & Breakfast Rule.
Each of these rules are designed to prevent wash sales, which is a scenario in which an investor intentionally sells or disposes of an asset that has decreased in value and then buys it back soon after. The Same Day Rule and the Bed & Breakfasting Rule exist to eliminate the potential tax benefits of wash sales.
If you buy and sell a cryptocurrency the same day, then the sale is considered made from the coins you bought on that same day.
That means the cost basis for your sale will be the acquisition cost of the crypto you bought on the same day. This will be the case even if the acquisition of the crypto takes place after the sale — as long as they are both on the same day.
Also known as the 30-day Rule, this rule states that any of the crypto you acquire within 30 days of a sale will be used as its cost basis.
Each of these rules impacts which cryptos you “sell” and the order you sell them in from an accounting perspective.
When calculating your gains and losses and applying these three rules, your cryptocurrency will be treated as being disposed of in the following order:
Buying cryptocurrency with fiat currency like the British Pound is considered a non-taxable event.
However, you should keep a record of your cryptocurrency purchases so that you can calculate your capital gains and losses in the case of a future disposal.
When you sell cryptocurrency, you’ll incur a capital gain or loss depending on how the price of your crypto changed since you originally received it.
Trading one cryptocurrency for another is considered a taxable event. You’ll incur a capital gain or loss depending on how the price of the crypto you’re trading away has changed since you originally received it.
If the price of your cryptocurrency at disposal is lower than your original cost basis, you can claim a capital loss. Capital losses can offset your capital gains in the current year and can be carried forward to offset capital gains in future tax years.
You should register your capital losses on your Self-Assessment Tax Return.
Once you’ve registered your cryptocurrency losses, you can carry them forward indefinitely. However, you have a four year time limit to register your capital losses. After this period, you can no longer register your losses and use them to offset gains.
If you earned crypto income in compensation for your work, you will be taxed based on your cryptocurrency’s fair market value at the time it was received.
Cryptocurrency received from mining is considered a form of income. The income you recognize is equal to the fair market value of the crypto at the time you gain possession of the coin.
The amount of income recognized then becomes the cost basis in the coin moving forward.
Of course, it’s also important to remember that your cryptocurrency income from mining and/or staking is classified differently whether you are mining as a hobby or as a business.
If you are mining as a Hobby, your income has to be declared separately under the heading of "Miscellaneous Income" on your tax return. Appropriate expenses can be deducted from taxable income.
When you dispose of your mining rewards, you’ll incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
Remember, the HRMC has stated that there is no need to complete a Self Assessment tax return for your mining activity if you’ve received less than £1,000 in crypto-assets.
If you are mining as a business, your mining income will be added to trading profits and be subject to income tax. Any profits made from disposals will also be considered income. Appropriate expenses are also deductible.
You can learn if your activity should be classified as a business or as a hobby with HMRC’s guide here.
Cryptocurrency staking rewards are taxed as income upon receipt. When you dispose of your staking rewards, you’ll incur a gain or loss depending on how the price of your crypto has changed since you originally received it.
According to the HMRC, cryptocurrency received from airdrops may be considered income if it’s given in exchange for a product or service.
Cryptocurrency from airdrops is not considered income if it meets the following two conditions:
To better understand how airdrops are taxed, consider the 2021 $ENS airdrop. In this case, anyone who previously used the Ethereum Naming Service was entitled to claim $ENS tokens. It’s likely that this would be considered a taxable event since the tokens were given in exchange for using a service.
Whether or not your airdrop rewards are considered income, disposing of your airdropped cryptocurrency is considered a taxable event subject to capital gains tax.
Any fees involved in acquiring or disposing of your crypto can be added to your cost basis. This includes any transaction fees and gas fees.
Reporting gas and transaction fees come with benefits from a tax perspective. In the event that you sell your crypto at a profit, a higher cost basis can reduce your capital gains tax.
Giving a crypto gift to your partner or spouse is considered tax-free. In addition, this will not be counted towards your capital gains allowance for the year.
On the other hand, giving a crypto gift to someone other than your spouse or partner is considered a taxable disposal. You will need to keep a record of the fair market value of your cryptocurrency at the time the gift was given to calculate your capital gains or losses.
If you choose to donate cryptocurrency to charity, you are entitled to Income Tax relief. If you are a higher-rate taxpayer, you’ll be able to claim the difference between your rate and the basic tax rate based on the fair market value of your crypto at the time it was donated.
However, you may be required to pay capital gains in the following circumstances:
NFTs are taxed similarly to cryptocurrencies. However, NFTs are not subject to the same shared pool accounting rules.
If you are buying an NFT with cryptocurrency, you will incur capital gains or losses depending on how the price of the cryptocurrency you are using to make the purchase has changed since you originally received it.
If you are selling an NFT, you will incur capital gains or losses depending on how the price of your NFT has changed since you originally received it.
If you are minting an NFT in the act of a trade or business, any earnings from primary and secondary sales will be considered business income and will be taxed accordingly.
According to the HRMC, DeFi transactions can be subject to capital gain or income tax depending on the specific nature of the transaction.
DeFi staking rewards may be subject to capital gains or income tax depending on the specific mechanisms of your DeFi protocol.
In some situations, staking an asset can be considered a taxable transaction subject to capital gains tax. For example, when you deposit ETH and receive stETH, you will incur a capital gain or loss as this will likely be seen as a taxable crypto-to-crypto trade.
In other situations, earning staking rewards is more likely subject to income tax. Receiving staking rewards in the form of new tokens in your wallet is likely considered ordinary income.
Currently, many DeFi protocols offer loans to users. When a user locks up their existing cryptocurrency as collateral, they can receive tokens in return. For example, you could put ETH as collateral and in exchange, receive DAI.
Lending collateral to a DeFi protocol typically is not a taxable event. The HMRC has given guidance detailing circumstances when submitting collateral can be considered a taxable disposal, which may occur when your collateral gets moved to another platform.
If you hold cryptocurrency that’s become worthless or lost access to your private keys, you can claim a capital loss. A capital loss can offset any capital gains for the year and reduce your overall tax liability.
If you hold a crypto-asset that becomes worthless, you can file a negligible value claim. This allows you to treat the asset as if you’ve disposed of it, even if you still hold it. You’ll also be able to claim the associated capital loss.
Your negligible value claim should include the following information.
A negligible value claim can also be filed in the case that you lose your private keys. This claim should be filed in the same year that you lost access to your cryptocurrency.
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This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.
