Reporting taxes on cryptocurrency

26 May 2022

As cryptocurrencies have grown rapidly in popularity over the years, so have the number of people making money by investing or trading them. One of the big challenges for many is understanding how cryptocurrency is taxed and how it should be reported to the tax authorities.

Reporting obligations should not be ignored as HMRC has access to the names of users of crypto exchanges and have recently stepped their use of nudge letters.

What is cryptocurrency?

Cryptocurrencies are cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically.

They are not regarded as currency by key financial institutions and HMRC view cryptocurrency in a similar way to shares.

When does capital gains tax apply? 

As a result of being treated like shares, capital gains and losses rules usually apply when cryptocurrency is disposed of. Disposals include:

  • Selling cryptocurrency for money
  • Exchanging cryptocurrency for a different type of cryptocurrency
  • Using cryptocurrency to pay for goods or services
  • Giving away cryptocurrency to another person (not including your spouse) 

How do I calculate the capital gain?

To arrive at the capital gain or loss there are special rules which apply to match crypto sales with purchases in the following order:

  • The same type of crypto assets purchased on the same day
  • The same type of crypto asset purchased in the following 30 days
  • The average cost of any unmatched crypto assets of the same type

Maintaining records that enable these rules to be applied is not easy. Fortunately, most crypto exchanges are able to produce annual reports that calculate the gains and losses in accordance with the rules. There are also third party companies that will prepare similar reports from your uploaded transaction data.

You can make capital gains up to the annual exemption limit (currently £12,300) before paying capital gains tax.  Any capital gains above the annual exemption will be taxed at either 10% or 20% depending on whether or not you are a higher rate taxpayer.

What is worthless cryptocurrency?

If you have sold your cryptocurrency at a loss you can claim a capital loss, this can offset any capital gains for the year and reduce your overall tax liability.

If you hold cryptocurrency 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. Your negligible value claim should include the type of cryptocurrency, the amount the asset should be treated as disposed of and the date.

Can I gift cryptocurrency?

Gifting cryptocurrency to someone other than your spouse is considered a disposal event for capital gains purposes and a capital gain needs to be calculated with deemed proceeds equal to the market value of the asset. Such a gift will be a potentially exempt transfer for inheritance tax purposes with the value still included in your taxable estate if you do not survive seven years.

You are entitled to income tax relief if you choose to donate cryptocurrency to charity. If you are a higher rate taxpayer, you will 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. 

Am I a crypto trader?

If your buying and selling of cryptocurrency amounts to a trade, you will pay income tax and national insurance on your profits rather than capital gains tax. In most cases this will result in a much bigger tax liability so it is important to get the treatment right.

So how does HMRC decide whether you're holding cryptocurrency as an investment or whether you qualify as a crypto trader? Here's what HMRC has to say about it and it seems very clear:

“Only in exceptional circumstances would HMRC expect individuals to buy and sell crypto assets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself. If it is considered to be trading then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered a business."

What’s next?

Whether you are already involved in cryptocurrency or planning for the future, if you would like to discuss your tax position with us for additional clarity, please get in touch.

We can support you with your self-assessment, ensure that you are paying the right tax and make sure you’re accounting for any gains and losses in the correct way.