HMRC has published guidelines outlining the tax treatment of bitcoin and other crypto-assets. In this guide, you will learn everything you need to know about how to calculate your taxes, how to minimize your capital gains, and what is required to be reported by HMRC. You will also learn how to generate and file your crypto tax reports.
More specifically, these are the topics and questions we will address in this guide:
- HMRC Crypto Tax Guidance
- Share Pool Accounting
- Capital Gains and Allowances
- Buying, Selling and Trading
- Margin and Futures Trading
- Taxable Income From Mining and Staking
- Tax on Airdrops and Hard Forks
- Other Taxable Events
- Minimize your Taxable Gains
- Lost and Stolen Crypto
- How to File Your Tax Reports
- Crypto Tax Deadline in the UK
HMRC Crypto Tax Guidance
Her Majesty’s Revenue and Customs (HMRC) has published guidelines and several policy papers detailing how cryptocurrencies are taxed in the United Kingdom. In general, all individuals are taxed at the time when disposing of an asset. HMRC has defined ‘disposal’ in the policy paper Cryptoassets: tax for individuals as the following:
- selling crypto assets for money
- exchanging crypto assets for a different type of crypto asset
- using crypto assets to pay for goods or services
- giving away crypto assets to another person
In most cases, you will be taxed according to Capital Gains treatment. In case you are considered to be an active or professional trader you will be subject to income tax treatment instead.
Your capital gains are in general calculated as the difference between the GBP value of the sales proceeds and the acquisition cost of the disposed asset. We will go more into depth about capital gains together with practical examples in the next sections.
Share Pool Accounting
HMRC has stated that the concept of pooling should be used to calculate the cost basis. This method allows for simpler capital gains tax calculations, and applies to shares of companies and also “any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired”. HMRC says that cryptocurrencies fall within this description and should therefore be pooled.
In practical terms, this means that each cryptocurrency you have bought, traded, or sold has its own pool and associated pooled allowable cost. The pool consists of the total number of coins you own, and the allowable cost is the total amount originally paid. Each time you buy or sell a cryptocurrency, the pool and associated cost will therefore change (Coinpanda updates the pool and associated cost automatically for each transaction for UK users).
If only some of the coins you own are sold, it will be considered a part-disposal. Capital gains are then calculated by considering a corresponding proportion of the total pooled allowable cost. This method is sometimes also referred to as the Average Cost Basis.
Example 1: Share pool and total allowable cost
Henry bought 2 BTC for £6,000 in 2017. In 2018 he bought another 1.5 BTC for £9,000. By applying the concept of pooling as explained earlier, Henry has now a pool of 3.5 BTC and a total allowable cost equal to £15,000.
Later in 2020, Henry decides to cash in some profits and sell a part of his bitcoin investment. He sells 2.5 BTC for £21,000. His transactions can be seen in below table:
|Type||Date||Amount||Price||Cost Basis||Capital Gains|
To calculate his capital gains, Henry needs to find the less allowable cost (cost basis) for his disposal of 2.5 BTC: £15,000 * (2.5 / 3.5) = £10,714. The total capital gain is then found as £21,000 – £10,714 = £10,286.
|Type||Date||Amount||Price||Cost Basis||Capital Gains|
After the sale, Henry has 1 BTC left in his pool and a total allowable cost of £15,000 – £10,714 = £4,286.
Special rules to prevent wash sales apply to cryptocurrencies in a similar way to shares of companies. The HMRC does this to prevent people from selling a crypto (or share) and repurchasing it shortly after with the intention of realizing losses and therefore reducing the total capital gains.
When you spend, sell or trade a cryptocurrency, you need to calculate the capital gains by disposing the coins in the following order:
1) Same-day rule: coins bought on the same day as the sale (disposal)
2) 30-day rule: coins acquired within 30 days of the sale (disposal)
3) Total pool: all coins previously acquired
Buying a crypto asset on the same day
If you sell a cryptocurrency and buy the same coin on the same day, the acquisition cost will not be calculated from the main pool. Instead, the cost basis is calculated using the costs of the new tokens bought. This is done by considering all purchases on the same date – even if the acquisition has happened before you dispose of the asset.
If you have made multiple purchases at different prices on the same day, the cost basis is calculated by finding the average acquisition cost (see HMRC Capital Gains Manual).
Buying same crypto within 30 days
Similar to the same-day rule, the 30-day rule says that any cryptocurrency acquired within 30 days of the sale should be considered for calculating cost basis instead of the main pool. Rather than calculating the average acquisition cost as done for the same-day rule, FIFO logic should be applied for calculating the cost basis for the 30-day rule.
If any of the special rules above apply, and the number of coins sold exceeds the number of new coins acquired, the total calculation will also include the acquisition cost from the total pooled allowable cost.
We will explain these rules better using a practical example:
Example 2: The 30-day rule explained
Sara invested in ethereum in August 2018 and has a total of 65 ETH in her wallet. She has spent a total of £4,500 acquiring them which is her pooled allowable cost.
Later she decides to sell some of her initial investment. On November 15th 2019 she sells 20 ETH for £2,900.
A few weeks later she decides to buy back some of the ethereum she sold. On December 3rd she buys 5 ETH for £500.
Because the newly acquired ETH were bought within 30 days of the disposal they will not be considered as part of the total pool. To calculate her capital gains from the sale of 20 ETH she needs to treat this as two separate disposals:
- 5 ETH that was bought after the disposal
- 15 ETH from the total pool
Her transaction history can be seen in below table:
|Type||Date||Amount||Price||Cost Basis||Capital Gains|
The cost basis for the 5 ETH bought on December 3rd is considered in the calculations using the 30-day rule. For the remaining 15 ETH, we find the cost basis from her pooled allowable cost.
Total cost basis will be £500 + £4,500 * 15 / 65 = £1,538. Her total capital gains are therefore found as £2,900 – £1,538 = £1,362
Sara still has 50 ETH in her pool which after the disposal has an allowable cost of £2,962.
|Type||Date||Amount||Price||Cost Basis||Capital Gains|
For more information about how cost basis is calculated in the UK, see our detailed article covering this here:
Capital Gains and Allowances
In the UK, you only pay capital gains tax on your gains above the tax-free allowance (sometimes referred to as the Annual Exempt Amount). For the 2020/2021 tax year, the capital gains tax-free allowance is £12,300. This amount is applicable for capital gains across all capital assets.
The amount of capital gains tax you will need to pay (if exceeding the tax-free allowance) depends on the total amount of your taxable income. For the 2020/2021 tax year capital gains tax rates for cryptocurrencies are:
- 10% for your entire capital gain if your overall annual income is below £50,000
- 20% for your entire capital gain if your overall annual income is above the £50,000 threshold
Be aware that even if your total capital gains do not exceed the tax-free allowance, you might still need to report your gains. If the total proceeds from the sale of cryptocurrencies in a given tax year exceed four times the Annual Exempt Amount (4 * £12,300 = £49,200) you are required to report the gains on your tax return.
Buying, Selling and Trading
In this section, we will look at different transaction types and the taxable implications.
Buying cryptocurrency (Ex: GBP → BTC)
This is not considered a taxable event. Note that it’s important to keep track of all your purchases and complete transaction history so that you can calculate your cost basis and deduct the costs when you later dispose of the assets.
Selling cryptocurrency (Ex: BTC → GBP)
Selling any type of cryptocurrency is considered a taxable event and you will need to calculate your capital gains for each transaction.
Trading cryptocurrency (Ex: ETH → LTC)
HMRC defines “exchanging cryptoassets for a different type of cryptoasset” a disposal. A crypto-to-crypto transaction (trading) is therefore considered a taxable event similar to selling cryptocurrency for fiat currency.
Normally, the market value of the acquired cryptocurrency is used to determine the sales proceeds for each trade transaction.
Selling cryptocurrency for stablecoins (Ex: BTC → USDT)
Stablecoins such as Tether (USDT), TrueUSD (TUSD) and Paxos (PAX) are treated similarly to any other cryptocurrency by the HMRC, hence all transactions with stablecoins are therefore considered a taxable event similar to crypto-to-crypto transactions.
Example 3: The 30-day rule explained
Olivia exchanges 0.3 bitcoin for 15 litecoin. Her original cost of 0.3 bitcoin was £1,500. At the time of the exchange, 15 litecoin is valued at £2,300. This means that the sales proceeds for selling 0.3 bitcoin are £2,300 and the cost basis is £1,500. The resulting capital gains are calculated to be £2,300 – £1,500 = £800.
Margin and Futures Trading
HMRC has not released specific guidelines for the treatment of margin and futures trading of cryptocurrencies. This type of trading has become very popular the last few years, and if you have traded on exchanges like BitMEX or Bybit it means you have also bought or sold futures contracts.
If you are considered to be a financial trader by HMRC, you should report your gains as income on your tax return and pay income tax. If you are not considered to be a financial trader, HMRC is not clear whether your gains and losses are subject to capital gains tax or should be declared as income.
It is our interpretation that the safest approach is to report your gains and losses from margin trading as capital gains.
For more information about taxation on cryptocurrency margin and futures trading, please refer to our detailed article that covers this in more detail:
Taxable Income From Mining and Staking
Any cryptocurrency received from mining activity, such as bitcoin or ethereum, shall be reported as income in your annual tax return. However, different tax rules apply if HMRC considers the activity to be classified as a business or just a hobby. This depends on several factors such as:
- Degree and frequency of activity
- Level of organization
- Associated risks
- Commerciality of the operation
If your mining activity is classified as a hobby, and not a business, you should declare the GBP value (at the time of receipt) of any crypto asset received as miscellaneous income on your tax return. You are allowed to include any appropriate expenses to reduce the net income amount. If you decide to keep the received coins in a wallet, they will be part of your pool and the GBP value will be included in the total allowable cost. If you decide to sell the coins in the future you may have to pay capital gains tax if the crypto has appreciated in value.
If HMRC deems the mining activity to be a business based on the criteria listed above, the mining income should be reported as trading profits and therefore subject to income tax. Similar to mining classified as a hobby, you can deduct appropriate expenses to reduce the net taxable amount.
When it comes to staking coins, HMRC has not released specific guidance for this. Because staking of cryptocurrencies is similar in nature to mining of cryptocurrencies, the safest approach is to treat received coins from staking in a similar fashion to mining.
For more information about taxes on cryptocurrency mining and staking, please refer to our detailed articles that cover this in more detail:
Tax on Airdrops and Hard Forks
HMRC has released clear guidance to the treatment of both cryptocurrency airdrops and hard forks. In this section, we will take a closer look at the tax treatment of such transactions.
Tax on Airdrops
You might have received an airdrop of unknown tokens in your exchange wallet (such as Binance) or ethereum wallet. In most cases, an airdrop of cryptocurrency tokens is part of a marketing or advertising campaign. Some airdrops require you to register before a deadline to become eligible to take part in the airdrop, but you may also receive tokens just from holding another asset in your wallet.
HMRC says that income tax may not apply if any of the following conditions apply:
- You have received crypto without doing anything in return
- The crypto received is not part of a trade or business involving mining
However, if you have received crypto in return for a service the coins will be subject to income tax and should be declared as miscellaneous income. If you are operating a business, they will be part of your trading profits.
If you decide to sell the coin at a later time, it will be subject to capital gains tax. We covered the treatment and calculation of capital gains tax in Section 2, 3 and 4.
Tax on Hard Forks
An update to the blockchain protocol can result in a soft fork or hard fork. A soft fork is an update that automatically gets adopted by all participants (miners, nodes etc). This does not result in the creation of new tokens or a new blockchain. A hard fork, on the other hand, can result in a blockchain split where new tokens come into existence.
If you owned tokens on the original blockchain before the hard fork (split), you will in most cases own an equal number of tokens on both blockchains after the event. An example of a blockchain split is Bitcoin Cash that was created in August 2017 when a group of miners decided to fork the bitcoin blockchain. If you held 1 bitcoin at the point of the hard fork, you would hold 1 bitcoin and 1 Bitcoin Cash after the event.
HMRC has provided guidance to the treatment of hard forks in their policy papers for tax on cryptoassets. After the fork, each crypto asset goes into their own pool. The total allowable cost associated with the original pool should be split between the two assets. The HMRC has not defined specific rules for how the cost should be split, but has stated that costs must be split on a just and reasonable basis under section 52(4) Taxation of Capital Gains Act 1992.
The most commonly used approach is that the cost of the original crypto is apportioned between the old and new asset based on the assets’ fair market value the day after the hard fork. You can also assign 100% of the cost to the original crypto, such that the new crypto will have a 0 cost associated with the new pool.
Other Taxable Events
Tax on ICOs & IEOs
ICOs (“Initial Coin Offerings”) and IEOs (“Initial Exchange Offerings”) are a popular form of raising capital by companies and projects launching their own blockchain or token. In both cases, a person typically invests in a token that will be released in the future and pays with another cryptocurrency like bitcoin or ethereum.
An IEO differs from an ICO that it is conducted by an exchange, and the token is in most cases listed on the exchange shortly after the IEO has concluded.
HMRC has not provided specific guidance for the treatment of ICOs or IEOs, but since this is very similar to a crypto-to-crypto transaction we can use the same taxation principle. If you invest in token XYZ and pay with bitcoin, you will have to calculate capital gains on the disposed bitcoin. You will need to use the fair market value of bitcoin on the date you made the investment which will also become the cost basis (or allowable cost) for the newly purchased tokens.
Capital gains tax
Gifts & Donations
Gifting and donating cryptocurrency is treated differently for tax purposes by HMRC.
If you are gifting cryptocurrency to a person other than your spouse or civil partner, you are required to calculate and report your capital gains. In practical terms, the same principles for selling a crypto applies also for gifts. The capital gains are found by comparing the sales proceeds with your allowable costs. You can use the fair market value in GBP on the date that you made the transfer to calculate the sales proceeds.
You do not have to pay any capital gains tax on crypto assets donated to charity. However, there are two exceptions to this rule:
- If you make a tainted donation. This refers to an arrangement to obtain certain financial advantages from a charity.
- If the fair market value of the assets disposed of is higher than the acquisition cost found from your pooled allowable cost.
In either of the above cases, you might need to report and pay capital gains tax.
Capital gains tax
If you have received interest on your cryptocurrency you will need to treat this similar to cryptocurrency received from mining or staking. This means you should report the interest received as miscellaneous income on your tax return.
Other crypto income
Today, some employers are paying salaries in cryptocurrency instead of fiat (like GBP) to their employees. HMRC states that crypto received as employment income count as moneys worth. This means you need to pay income tax in addition to National Insurance contributions on the fair market value of the asset.
The same rules apply for both employees and freelancers. In both cases, the fair market value is determined on the date of receipt.
Minimize your Taxable Gains
There are several ways you can minimize your taxable gains. In this section, we will look at the three most commonly used methods more in detail.
Offset capital gains
If you sell a cryptocurrency and receive less than the calculated cost basis, you will have realized a capital loss on the asset. Such losses can be used to offset your total capital gains, either in the same tax year or in future tax years.
Losses must be claimed by including it on your tax return. HMRC says that you don’t necessarily need to report losses straight away, and you can actually claim losses up to 4 years after the end of the tax year that you sold the asset. This means that if you have unclaimed losses from 2018, you can use these losses to offset other capital gains for the tax year 2019/2020 or 2020/2021 for example.
In almost all cases, you will be paying trading fees when you are buying, selling or trading cryptocurrency. Trading fees are considered allowable costs that can be deducted from the sales proceeds amount.
Some exchanges charge quite high fees, and in some cases even above 2%. If you have a large number of transactions, deducting the fee amount can make a significant impact on your total tax liability. Most crypto tax solutions like Coinpanda does this automatically for you.
Low value and illiquid cryptocurrencies
A significant amount of cryptocurrencies have lost almost all their value since the all-time high (ATH) value. Chances are that you still own a token that is almost worthless today with very low liquidity on a few changes. Luckily, HMRC has issued guidance on how to make a negligible value claim on the disposal of such assets which can be used to reduce your total capital gains.
To do this, simply fill out the claim by entering information such as the name of the cryptocurrency and the value in which the asset should be treated as disposed of. If the crypto has practically no liquidity, you can normally consider the value to be £0.
Lost and stolen cryptocurrencies
In some cases, you can reduce the tax liability if you have lost access to your private keys or been a victim of fraudulent actions. See the next section for more about this.
Lost and Stolen Crypto
Losing private keys
If you lose your private keys and cannot access the cryptocurrency anymore, the asset is still technically owned by you since it exists on the blockchain. Because of this, HMRC does not consider the misplacing of private keys to be a disposal for capital gains tax.
If there is no possibility of recovering the private key and gaining access to the assets in the wallet, you have the option to make a negligible value claim as explained in Section 12. This means the loss can be crystallized to reduce your total capital gains.
Unfortunately, there are many fraudulent actors with bad intentions in the cryptocurrency community. A lot of people have been scammed by such people, often by transferring bitcoin or ether to an address with the hope of getting more value back.
HMRC does not consider fraud or theft to be a disposal since you still have the right to recover them, and therefore also are the rightful owner of the assets. The implications of this are that you cannot claim a loss for capital gains purposes.
If you pay for a cryptocurrency and it turns out to be almost completely worthless, you can make a negligible value claim and reduce your capital gains if HMRC accepts the claim.
How to File Your Tax Reports
Filing and reporting cryptocurrency taxes can sound complicated and intimidating at first. The whole process can be summarized in the following 6 steps:
- Download the transaction history from all exchanges where you have bought or sold any cryptocurrency. To calculate your cost basis correctly, it is important to include the history for ALL previous years.
- Review your transaction data and make sure that the calculated balance matches your actual portfolio.
- Look up and assign market rates to all transactions which do not include pound sterling (Ex: ETH → LTC). This is required to calculate the cost basis correctly.
- Determine the cost basis value for each transaction according to share pooling rules set by HMRC. Remember the possible implications of the same-day and 30-day rule.
- File your crypto taxes before the deadline. You can file your taxes either online or complete a paper tax return.
This can be a very tedious and complicated process for most people that have had more than a few transactions during the year. Most crypto investors and traders prefer to use a cryptocurrency tax solution such as Coinpanda to help them with calculating and filing their annual tax report. Coinpanda simplifies this process by carrying out steps 1 to 4 automatically.
Crypto Tax Deadline in the UK
The tax year in the UK is from April 6 – April 5 the following year. If you file your tax return electronically, the deadline is midnight on January 31 the following year. Paper returns are due by midnight on October 31.
If you are filing taxes for the 2019/2020 tax year (April 6, 2019 – April 5, 2020), the deadline is either October 31, 2020 (paper returns) or January 31, 2021 (electronic returns).
Your tax bill also needs to be paid by the deadline. If you file your tax return late, miss the deadline for payment, or file an incomplete tax return, you might have to pay a penalty as explained here.
Remember to keep records of all your transactions. Some crypto exchanges may only save your transaction history for a few months. HMRC says that it is the taxpayer’s responsibility for practicing record keeping, and should include the following details:
- The type of cryptocurrency
- Date of the transaction
- If they were bought or sold
- Number of coins/tokens
- Value of the transaction in pound sterling
- The cumulative total of the investment units held
- Bank statements and wallet addresses (if needed for an review)
Coinpanda’s tax product can create a capital gains report with all of this information for you.