Although all information provided in this guide has been verified in communication with HM Revenue & Customs (HMRC), it is purely educational in nature and not legal advice. We always advise consulting a tax professional to discuss your individual circumstances.
The main thing to remember is to keep records!
- Bear in mind that exchanges that are around now might not be in a few years’ time when you decide to sell.
- Most exchanges will let you download CSV files of your trades.
- If you are feeling lazy, at least try to take a screenshot of recent transactions you have made.
- You can create a separate email address for all your crypto records so that you can quickly email files to yourself for reference later. Please don’t let your security details come anywhere near it though!
Here are some common positions you may find yourself in:
1. I’VE BOUGHT SOME BITCOIN OR OTHER CRYPTOCURRENCY
When you buy bitcoin or cryptocurrency, nothing is expected of you at point of sale. However you will need a record of the price you bought it at to calculate taxes when you sell it in the future.
2. I WAS GIFTED SOME BITCOIN OR OTHER CRYPTOCURRENCY
For future tax purposes, make a note of the value of the gift on the date of the gift.
3. I’VE JUST SOLD SOME CRYPTOCURRENCY FOR FIAT
The tax that you might be liable for in this instance is Capital Gains Tax (CGT) – a tax on the profit that is made when you sell something that has increased in value. If tax is due it is only on the gain that you have made, not the entire amount you receive from the sale. This is why keeping records of the purchase value of your cryptocurrency is important. You can also include transaction costs such as transfer fees when calculating your gain.
The annual tax-free allowance for an individual’s asset gains is £11,700 for 2018/19. So if the profit from selling your cryptocurrency, in addition to any other asset gains, is less than this, you won’t have to report or pay tax on it.
However, if you sell up to four times the annual allowance (£46,800 for 2018/19) of crypto-assets, even if you make a profit of less than £11,700, you have to report this sale to HMRC. You can do this either by registering and reporting through Self Assessment, or by writing to them at:
PAYE and Self Assessment
HM Revenue and Customs
An extra tip for married individuals: you can gift £11,700 of assets to your spouse and use their Capital Gains Tax allowance if they are not using it, thereby getting up to £23,400 of capital gains tax free annually.
You have two options for how you declare your gains to HMRC:
a. In your annual Self Assessment tax return
If you are self-employed or run a business, you might already send a tax return. But if you don’t, then you have to register for Self Assessment by 5 October following the tax year you sold your cryptocurrency. (Again, the tax year runs from 6 April to 5 April. If your sale takes place on 18 April 2018, or 4 April 2019, then you have to register by 5 October 2019.) If you’re already registered but haven’t received a letter reminding you to fill in a return, contact HMRC by 5 October. You must send your return by 31 January of the next tax year.
HMRC will then contact you with instructions for payment.
b. As soon as you want after the sale using the ‘real time’ Capital Gains Tax service
You must report by 31 January after the tax year when you had the gains. (The tax year runs from 6 April to 5 April the following year. So if your sale takes place on 18 April 2018, then you have to report by 31 January 2020. If your sale takes place on 4 April 2019, you also have to report by 31 January 2020.)
HMRC will then contact you with instructions for payment.
It is recommended only to use this option as a last resort, for example, if you are late in registering or filing your return.
4. I’VE JUST SOLD SOME CRYPTOCURRENCY FOR OTHER CRYPTOCURRENCY / STARTED TRADING
Until you declare yourself as a trader to HMRC (as below), you are considered an investor and your annual gains are subject to Capital Gains Tax as above.
Remember that even if you make less profit than the CGT allowance but have sold more than four times the allowance’s worth in cryptocurrency, then you have to report this to HMRC as above.
If you have made more than the CGT allowance then you will have to report and pay tax on your gains. Bear in mind that every single trade you make – even crypto to crypto – will most likely impact tax calculations. To calculate capital gains on a crypto to crypto trade, convert everything into GBP value at the time of the trade. (I know.. it’s crazy.) So if you have made a significant number of trades, it is probably worthwhile getting a tax professional just to make sure you get things right.
What is significant with respect to CGT is the concept of share matching, roughly translated to a complex example BTC scenario as follows:
Say you have accumulated 1 BTC over 8 months, having bought 0.25 BTC every two months at different prices ( January: £1500, March: £2000, May: £2500, July: £3000). On 1 October 2017 you buy a further 0.25 BTC at £3500 before deciding to sell 0.6 BTC that same night – but at what price did you buy this amount? Furthermore, after selling this, you decide to buy 0.2 more BTC at £3600 on 17 October 2017.
This is the order in which your BTC is priced and disposed of:
1. BTC that you have bought on the same day (‘same day’ rule)
So in our case, the 0.25 BTC bought at £3500 on the 1 October 2017 will be accounted for at that price, leaving a further 0.6 – 0.25 = 0.35 BTC to account for. This portion will cost 0.25 * £3500 = £875.
2. BTC acquired within 30 days of the sale (‘bed and breakfasting’ rule)
In our case, the 0.2 BTC bought on 17 October 2017 will be accounted for at £3600, as it is within 30 days of the sale date of 1 October 2017, leaving a further 0.35 – 0.2 = 0.15 BTC to account for. This portion will cost 0.2 * £3600 = £720.
3. A BTC pool where the cost has been averaged
You will pool your BTC together (the equivalent of a ‘Section 104 holding’ for shares) and average the cost.
So in this case, the average price will take into account all the BTC you have bought prior to the sale on 1 October 2017. (The BTC you bought on 1 October 2017 has already been accounted for as a result of rule 1.) So we have (0.25 * £1500 + 0.25 * £2000 + 0.25 * £2500 + 0.25 * £3000) / 1 BTC = £2250 as the average cost price. The cost of this portion will be 0.15 * £2250 = £337.50.
So the total cost of the 0.6 BTC sold on 1 October comes to £875 + £720 + £337.50 = £1932.50
As you can see, it is a bit of a headache. Although there are services and apps which allow you to import CSV files of your trades from major exchanges and help you do some of these calculations, we can not currently recommend any particular service for UK-based investors. It really is best to get an accountant if your trading history is complex.
For further guidance regarding your specific case you may also call HMRC at 0300 200 3300. Friday afternoon has been suggested as a less busy and therefore better time to call.
5. I TRADE A LOT!
If you trade crypto but are unsure whether your trading constitutes a ‘trade’ in the eyes of HMRC, they suggest looking up the badges of trade to see how many you fulfil. However as this is not clear cut in any form, it’s probably best to discuss your position with a tax professional, as if you do qualify, you have to set up as a sole trader, after which your gains will become subject to Income Tax, not CGT. Usually your tax burden will be higher as a result.
Adrian Markey suggests that unless you are doing things a stockbroker might do – systematically trading full time every day, dealing with other people’s money, hedging against your investments, advertising your services and earning commissions, your trades will most likely be subject to CGT assessment as above, not Income Tax.
In any case, if you have to set up as a sole trader, register for Self Assessment if you haven’t done so already. You may do so online here. Note that you may be fined if you don’t do so by 5 October in your business’s second tax year. As a professional trader, you have to learn the tax rules of running a business – details regarding this can be found in the Business Income Manual.
6. I’VE BOUGHT SOMETHING USING CRYPTOCURRENCY
When one spends cryptocurrency in order to purchase a good or a service, this is still considered an asset disposal and has to be assessed as such.
Let us take the simple example of Jim buying a coffee worth £2.80.
He pays 0.00038 BTC, as the exchange rate at the time of the purchase is £7345.42 / BTC.
What is important here is the price at which he purchased the BTC he is paying with.
To calculate this, we return to our disposal rules, in this order:
1. Any BTC Jim bought on the same day (‘same day’ rule)
2. Any BTC Jim acquired within 30 days of the sale (‘bed and breakfasting’ rule)
3. A pool where the cost of all the BTC Jim owns has been averaged
Let’s say Jim happened to buy 0.001 BTC that very morning at an exchange rate of £7289.67 / BTC. We can therefore use rule 1 – the ‘same day’ rule, using this price for calculating the value of the BTC he used to pay for the coffee:
0.00038 * £7289.67 = £2.77
So Jim’s capital gain in this instance is £2.80 – £2.77 = £0.03!
Until HMRC provides explicit advice to the contrary, it is advisable to keep a spreadsheet of any purchases made with cryptocurrency, no matter how small, in case you exceed your personal capital gains allowance.
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