In this guide, we’ll cover everything you need to know about HM Revenue and Customs (HMRC’s) guidance on cryptocurrency taxes.
This guide is updated regularly by the CoinLedger Tax Team. All the information contained within this guide is taken from the latest guidance from the HMRC and interviews with UK-based tax professionals.
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 2023-2024 tax year, UK taxpayers had a Capital Gains tax-free allowance of £6,000. This will fall to £3,000 during the 2024-2025 tax year.
For example, let’s say you earned £50,000 of income and had £13,000 of cryptocurrency capital gain in the 2023-2024 tax year. In this case, you’d subtract the capital gains allowance and pay 10% tax on £7,000 of capital gain.
Because of cryptocurrency’s pseudo-anonymous nature, many investors believe that it’s impossible for the HMRC to track cryptocurrency transactions.
However, it’s important to remember that HMRC has a data sharing program in place with major exchanges—meaning that tax authorities can access KYC (Know Your Customer) information and crypto transaction data.
In January 2022, Coinbase sent an email to clients who had £3,000 or more in their account that their account information would be shared with HMRC.
It’s likely that other exchanges operating in the United Kingdom share customer information with tax authorities upon request.
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.
Wondering what cryptocurrency transactions are not subject to tax in the UK? Let’s walk through a few common transactions that won’t raise your tax bill.
While there’s no way to legally avoid your crypto taxes, there are strategies that you can use to reduce them.
Remember, your first £6,000 of capital gain is tax-free. It can be valuable to keep this number in mind when taking profits on 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.
Let's take a look at how specific crypto transactions are treated from a tax perspective in the UK.
There is no tax for simply holding cryptocurrency in the United Kingdom. You won’t be required to report your crypto to the HMRC unless you earn or dispose of your holdings.
Buying cryptocurrency with fiat currency like the British Pound is considered a non-taxable event.
However, you should keep a record of how much it cost to acquire your cryptocurrency 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 reduce your tax bill!
If you have a net loss for the year, your losses can be carried forward to offset capital gains in future tax years.
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.
You should register your capital losses on your Self-Assessment Tax Return.
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 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, 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 cryptocurrency 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 tax 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 a capital gain or loss 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 a capital gain or loss 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 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 can be considered a taxable transaction subject to capital gains tax. For example, some protocols may require you to deposit ETH to receive stETH. It’s likely that this transaction will be seen as a crypto-to-crypto trade and taxed accordingly.
In other situations, earning staking and liquidity mining rewards is more likely subject to income tax. If you receive rewards in the form of new tokens in your wallet, this will likely be seen as income.
Adding/removing cryptocurrency from a liquidity pool is likely subject to capital gains tax.
For example, adding cryptocurrency to a liquidity pool and receiving LP tokens in return will likely be considered a crypto-to-crypto trade. You’ll incur a capital gain or loss depending on how the value of your crypto changed since you originally received it.
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. 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 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.
In the United Kingdom, inheritance tax applies if the total value of the estate exceeds £325,000. This includes the fair market value of crypto and NFTs on the date of death.
There is no Value Added Tax (VAT) for exchanging fiat currency for crypto (and vice versa).
However, if you use cryptocurrency to purchase goods, you will be subject to standard VAT.
In some cases, an individual trader may be treated as a business for tax purposes.
However, it’s unlikely that most taxpayers will fall into this category. Here’s what the HRMC has to say about this issue:
‘Only in exceptional circumstances would HMRC expect individuals to buy and sell exchange tokens with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself.’
If your trading activity does rise to the level of a business, your cryptocurrency gains will be subject to income tax rather than capital gains tax.
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.
To calculate your cost basis for a given cryptocurrency, you can use the shared pooled accounting method (more on this in the next section).
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 £6,000.
However, it’s important to remember that there are some restrictions on claiming capital losses. The Same Day Rule and the Bed & Breakfast Rule are designed to 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, the Bed & Breakfast 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:
To accurately report your taxes, you should keep the following records for all of your cryptocurrency transactions. These records can prove useful in the event of an HMRC inquiry.
Tracking this information can be difficult — especially if you’ve transferred your crypto between different wallets and exchanges.
Luckily, there’s an easier way. Crypto tax software like CoinLedger automatically connects to your wallets and exchanges to help you generate a comprehensive tax report in minutes.
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.
Pro Tip: In the Spring Budget 2023, the Chancellor of the Exchequer announced that the Self Assessment Tax Return will change and that crypto assets will need to be reported separately. However, these changes won’t come into effect until the 2024-2025 tax year.
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 all of your wallets and exchanges!
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:
There’s no need to track all of your transactions on a spreadsheet. CoinLedger can help you report your cryptocurrency taxes in three simple steps.
Whether you’re using an exchange like Coinbase or a blockchain like Ethereum, Coinbase has got you covered! Once you’ve downloaded your tax report, you can file it yourself or send it off to an accountant.
Get started with CoinLedger and join the 500,000 investors worldwide who use the platform to take the stress out of tax season!
Let’s cap things off by answering some frequently asked questions about cryptocurrency taxes.
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This guide breaks down everything you need to know about cryptocurrency taxes, from the high level tax implications to the actual crypto tax forms you need to fill out.
