HMRC has released extensive guidance on the tax implications of cryptocurrency, but to the untrained eye, for many UK crypto investors the guidance itself is not exactly clear. This is why thousands of UK crypto investors look for an accountant experienced in the crypto market to help them navigate their tax obligations. In fact, as crypto moves closer towards mainstream adoption than ever - UK crypto accountants have never been more in demand. We’ve got everything you need to know in our UK Accountant’s Crypto Tax Guide.
Want to dip your toe into the metaverse, but completely lost on all the jargon and technology surrounding cryptocurrency? You’re not the only one. Crypto accountants in the UK are in demand, but many accountants are put off by a lack of understanding of cryptocurrency. However, from a tax perspective, HMRC has excellent guidance on a huge variety of crypto transactions - and it’s nothing the majority of accountants haven’t tackled before.
To get you started, we’ve put together our Accountant’s Guide to UK Crypto Tax, packed full of the latest guidance from HMRC. But we also have many other helpful resources from Koinly Crypto Tax Academy we’d recommend bookmarking, including:
- Crypto Tax Glossary.
- What to Include in a UK Crypto Tax Report?
- How to Report Crypto to HMRC
- Calculating UK Crypto Taxes With Share Pooling
Desperate for more? We’ve got you covered with dedicated blog posts on how to do your crypto taxes for the most popular UK and global crypto exchanges including Binance, Coinbase and Kraken.
As well as this, if you want to help your client gain a better understanding of their crypto tax obligations in the UK, we have our UK Crypto Tax Guide.
With all that out the way, let’s jump in.
How popular is crypto in the UK?
As of March 2022, 6.1% of Brits own crypto and 19% of Brits have previously bought crypto according to a Finder study. While that's lower than the global adoption rate average of around 15%, it's still 4 million crypto investors - many of whom will be seeking aid navigating the complexities of crypto taxation.
How do HMRC view cryptocurrency?
HMRC has extensive guidance on the tax implications of cryptocurrency in their crypto assets manual, but here’s a quick ten-point summary:
- Crypto assets (also known as tokens or cryptocurrency) are cryptographically secured digital representations of value or contractual right that can be transferred, stored or traded electronically, including exchange tokens, utility tokens, security tokens and stablecoins.
- Cryptoassets are not currency or money.
- The tax treatment of all kinds of tokens is dependent on the nature and use of the token.
- Cryptoassets may be subject to Capital Gains Tax or Income Tax, depending on the specific transaction.
- Individuals need to calculate their capital gain or loss when they dispose of tokens.
- Disposals include selling tokens for money, exchanging tokens for a different type of token, using tokens to pay for goods or services, and giving away tokens to another person (excluding spouse).
- There is no disposal if the individual retains beneficial ownership of tokens throughout a transaction.
- Individuals will be liable to pay Income Tax on crypto assets they receive from their employer as a form of non-cash payment, as well as mining, staking or airdrops. If crypto assets are viewed as "money's worth", National Insurance contributions may also apply.
- Investors should use the share pooling accounting method, excluding for NFTs.
- HMRC has guidance on DeFi lending and staking. The tax implications all revolve around whether an investor retains beneficial ownership of their tokens and whether they receive a token in return for capital.
When does crypto trigger a CGT event?
A disposal of crypto - like the disposal of any other property - triggers a Capital Gains Tax event and investors must calculate a gain or loss. Disposals of crypto include:
- Selling crypto for GBP.
- Swapping crypto for crypto, including stablecoins and NFTs.
- Spending crypto to purchase goods and services.
- Giving crypto to someone, excluding to your spouse or civil partner.
In the UK, every taxpayer gets a Capital Gains Tax Allowance of £12,300, so investors are only liable to pay Capital Gains Tax on any amount over this allowance. There are two Capital Gains Tax rates of 10% or 20% - depending on Income Tax band the investor falls into.
We’ll look at examples of this a little further down.
Share pooling cost basis method
As with general property accounting, to calculate a gain or loss, we first need to know the cost basis of the property.
HMRC has very specific rules for calculating cost basis - known as share pooling. The share pooling method stops investors from creating artificial losses or manipulating the average cost basis method.
There are three possible cost basis methods within the share pooling method:
- Same-Day Rule: If an investor buys and sells coins on the same day, they need to use the cost basis on this day to calculate their gain or loss. If the investor is selling more than they bought on that day, move onto the next rule.
- Bed and Breakfasting Rule: If an investor sells and repurchases the same tokens within 30 days, they should use the cost basis of tokens they bought within that month to calculate their gain or loss. If they're selling more than they bought within this month, move onto the final rule.
- Section 104 Rule: If the above two rules don’t apply to any of an investor's crypto transactions, they need to use this cost basis method when calculating their crypto taxes. The section 104 rule works like the average cost basis method in that they must calculate an average cost basis for a pool of assets by adding up the total amount paid for all assets and dividing it by the total amount of coins/tokens held.
Find out more in our calculating crypto tax UK guide.
With the basics covered, let’s look at some examples of common transactions and the tax implications.
Selling crypto for GBP
Selling crypto for pounds - or any other fiat currency - is one of the most common disposals.
Investors may sell crypto through centralised crypto exchanges like Coinbase, Crypto.com and Gemini. They may also sell directly from their non-custodial wallet using peer-to-peer trading platforms.
Regardless of the platform the investor uses to sell their crypto, the tax implications remain the same - it is a disposal and therefore a capital gain or loss must be calculated.
To calculate the gain or loss, take the cost basis of the asset and subtract it from the sale price.
Let’s take a look at a couple of examples.
A client purchased 1 ETH on Crypto.com in March for £1,505 and paid a 0.4% fee, or £6.02, making the total cost basis for the asset £1,511.02.
The client sold 1 ETH on Crypto.com in July for £1,970 and paid another 0.4% fee, or £7.88 which may also be added to the cost basis - giving a total of £1,518.90.
To calculate the capital gain or loss, subtract the cost basis of the asset from the sale price.
£1,970 - £1,518.90 = £451.10. The client has a capital gain of £451.10. The client may be liable for Capital Gains Tax on that gain if their total net gain for the year is more than £12,300. The rate of Capital Gains Tax they’ll pay depends on their total annual income for the financial year.
A client purchased 1 BTC in August for £36,128 using their hardware wallet, via Ledger Live, and paid a 0.25% transaction fee, or £90.32, which can be added to the cost basis, giving a total of £36,218.32.
The client sold 1 BTC in March for £32,520. To calculate the capital gain or loss, subtract the cost basis of the BTC from the sale price:
£32,520 - £36,218.32 = - £3,698.32. The client made a capital loss of £3,698.32. The client may offset this loss against any capital gains for the financial year. If the client has already offset their capital gains enough to reduce their net capital gain down to the £12,300 allowance, they may carry forward their capital loss to offset against gains in future financial years.
Swapping crypto for crypto
Many investors are unaware that exchanging one crypto for another is a disposal in the eyes of HMRC and therefore a capital gain or loss must be calculated.
The disposal is of the asset previously held, not the asset acquired - although investors still need to track the fair market value of the acquired asset and any associated expenses to calculate their cost basis for future disposals.
There are a variety of transactions that are viewed as a crypto to crypto exchange and therefore a disposal, including:
- Trading crypto for stablecoins, on both centralised and decentralised crypto exchanges.
- Liquidity mining - and potentially any DeFi investment activity where tokens are received in return for capital.
- Swapping fungible crypto tokens for non-fungible token(s), or NFTs.
Let’s take a look at some examples to explain.
A client uses decentralised exchange Uniswap to trade ETH for DAI, a stablecoin on the Ethereum blockchain pegged at a 1:1 ratio with the US dollar.
The client originally purchased their ETH for £1,200. On the day of the transaction, the client trades their 1 ETH for 1670 DAI. We know DAI is pegged to the US dollar, so we know the fair market value (in USD) of DAI on the day of the trade was $1,670, but we need to convert this into GBP, which is £1,381.50 at the time of the transaction.
To calculate the capital gain or loss, subtract the asset’s cost basis from the fair market value at the time of the transaction:
£1,381.50 - £1,200 = £181.50. The client made a capital gain of £181.50 and may need to pay Capital Gains Tax on this gain if their net capital gain for the financial year is above the £12,300 CGT allowance.
As for the new DAI assets, we know from our calculation above that at the time of the transaction, the fair market value in GBP of 1670 DAI was £1,381.50. This figure is the cost basis for the new assets. Using the section 104 rule, to calculate the cost basis of each unit, we’d divide £1,381.50 by 1670, so each unit has a cost basis of £0.83.
HMRC have made it very clear that some DeFi investment activities will also be subject to Capital Gains Tax. It all depends on the nature of the transaction and whether that transaction has the nature of capital or the nature of income. If it’s the former, Capital Gains Tax applies, if it's the latter, Income Tax applies.
This means it all comes down to how the specific protocol works as to whether earnings may constitute business income or a capital gain.
In most instances, DeFi protocols utilise liquidity pools. These are a collection of investor funds that allow a specific transaction to be processed, all automated by pieces of code known as smart contracts that execute when certain conditions are met. For example, there is an ETH-DAI liquidity pool on Uniswap. The smart contract allows investors to use this liquidity pool to trade ETH for DAI, and DAI for ETH, but only when they have supplied the capital they’d like to trade.
By adding capital to these liquidity pools, investors can earn a proportional percentage of the transaction fees relating to the pool, as well as potentially additional rewards. It’s how these earnings are paid out that is key to the nature of the transaction. In most instances, these earnings are paid out via liquidity pool tokens (LP tokens).
For example, a client invests ETH and DAI into a Uniswap ETH-DAI liquidity pool. The client will receive ETH-DAI LP tokens, representing their capital in the pool. These ETH-DAI LP tokens accrue value as the client earns their percentage of the transaction fees relating to the liquidity pool. When the client wants to remove their capital from the pool, they will trade the ETH-DAI LP tokens back for their original assets.
This kind of transaction is more akin to a crypto to crypto swap. It has the nature of capital as no gains or income are realised until the point of the swap. This means that the client will need to calculate a capital gain or loss, both when they add to the pool and receive the LP tokens, and when they remove their capital from the pool by trading the LP tokens back.
A caveat though - although most DeFi protocols utilise LP tokens, not all do. Some choose to pay out rewards in new tokens, or use a combination of both LP tokens and new tokens. If new tokens were paid out instead, these would more likely have the nature of income and be subject to Income Tax upon receipt.
Despite the fact they’re non-fungible (unique) - the tax implications of NFTs are the same as any other crypto asset. Although buying crypto with GBP is tax free, in almost all cases, investors will purchase NFTs with crypto - like ETH. This is a disposal as it’s a crypto to crypto swap and a gain or loss must be calculated.
For example, a client uses ETH to purchase a DeadFellaz NFT on OpenSea. The NFT costs 10 ETH.
When the client purchased their 10 ETH, 1 ETH cost £1,300 meaning 10 ETH would be £13,000.
On the day the client purchased their NFT, the fair market value of 1 ETH was £1,500, meaning 10 ETH would be £15,000.
The client needs to calculate their capital gain or loss from the trade of ETH to the NFT.
£15,000 - £13,000 = £2000. The client made a capital gain of £2000 and may need to pay Capital Gains Tax on that gain if their net capital gain for the financial year is above the £12,300 allowance.
As for the new NFT asset, the cost basis of the asset is £15,000, plus any allowable fees.
Spending crypto on goods and services
Spending crypto on goods or services is a disposal and therefore a gain or loss must be calculated.
As crypto moves closer towards mainstream adoption, there are many places investors may spend their crypto in the UK including via Shopify, Whole Foods, Microsoft and many more. As well as this, many crypto companies like Crypto.com and CoinJar offer crypto debit cards that allow investors to easily spend crypto at any major store.
To calculate any capital gain or loss, taxpayers need to subtract their cost basis from the fair market value of their crypto on the day they spent it.
A client uses their CoinJar debit card to buy an Xbox Series X at Currys using BTC. The price is £449. On the day of the purchase, £499 is equivalent to 0.025 BTC.
The client needs to identify the cost basis for their 0.025 BTC to recognise their capital gain or loss. On the day the client originally bought BTC, 0.025 BTC was valued at £550.
£449 - £550 = - £101. The client made a capital loss of £101, which they may offset against any gains over the CGT allowance, or carry forward if they have no gains.
When is crypto viewed as income?
With gains tackled, let’s dive into when crypto may instead have the nature of income and be subject to Income Tax (and potentially National Insurance) upon receipt.
The simplest way to think about when crypto may have the nature of income is when a client is earning new tokens. There are a number of ways investors can earn new tokens or coins, including:
Let’s take a look at a few examples of Income Tax on crypto.
Staking can refer to two things in crypto - staking as part of a PoS mechanism, or staking via a third-party or DeFi protocol. The tax treatment all comes down to how the specific transaction works. We’ll look at an example of each.
A client is staking ADA as part of the Cardano PoS consensus mechanism using Daedalus Wallet. As a reward for validating transactions, the client receives new ADA tokens. As the client is receiving new tokens, these transactions would have the nature of income and the client would need to pay Income Tax upon receipt. To calculate the amount of additional income, take the fair market value of ADA tokens in GBP on the day the client received them.
However, DeFi staking in particular may work differently. For example, a client stakes ETH using the Lido protocol. The client receives stETH (staked ETH tokens) in return for their capital. This transaction more likely has the nature of capital as its exchanging one asset for another, as such Capital Gains tax may apply.
We’ve highlighted already that when it comes to DeFi investments, it all comes down to whether the transaction has the nature of income or the nature of capital and yield farming is no exception. Yield farming refers to ‘stacking’ various DeFi protocols on top of one another in order to reap the highest rewards.
A great example of how an investor may be yield farming is SushiSwap. A client adds capital to a SushiSwap liquidity pool and receives SushiSwap liquidity pool tokens (SLP tokens) in exchange. This transaction would have the nature of capital and therefore a capital gain or loss should be calculated. The client takes their SLP tokens and invests them in a SushiSwap farm to earn SUSHI tokens. As the client receives new SUSHI tokens, these transactions would have the nature of income and therefore these tokens would be subject to Income Tax upon receipt based on the fair market value in GBP on the day they received them. Finally, the client then stakes their new SUSHI tokens to earn XSUSHI tokens. In this transaction, when the client stakes their tokens, they receive XSUSHI tokens in return that accrue value. This transaction has the nature of capital and therefore a gain or loss should be calculated.
As you can see from above, the tax consequences on yield farming will all depend on the specific protocol, but HMRC’s crypto asset manual has excellent guidance on DeFi tax implications.
How crypto accountants can help investors
From helping clients optimise their taxes ahead of the end of the financial year, to meticulously following the share pooling rule to avoid penalties, to filing tax returns with HMRC, crypto accountants can help UK crypto investors every step of the way with Koinly.
Our cryptocurrency tax calculator tool lets you track realised and unrealised gains and losses, supports the share pooling accounting method and generates HMRC compliant tax reports, including a HMRC Capital Gains Summary Report, ready to file before the 31st of January.
We also have many helpful resources (like this one!). We also help investors find an accountant who can help them with our UK crypto accountants directory, as well as help educate investors on their crypto taxes with our Ultimate UK Crypto Tax Guide.
How to calculate and report clients’ crypto taxes
In general, there’s five steps to calculating and reporting crypto taxes to HMRC:
- Identify all the taxable crypto transactions for the financial year you're reporting on.
- Identify which transactions are subject to Income Tax and which transactions are subject to Capital Gains Tax.
- Identify the cost base for each transaction using the Share Pooling Cost Basis Method.
- Calculate your subsequent capital gains and losses, income and expenses.
- Report any income or capital gains over the allowance to HMRC before the 31st of January.
The forms needed to file crypto taxes will vary slightly depending on each client and their investments and whether they’re filing as an individual or a business, however in general clients will need:
- Self Assessment Tax Return. For anyone who was self-employed as a sole trader and earned more than £1,000.
- Self Assessment: Capital Gains Summary. For anyone who has capital gains or losses to file.
There is also the Real Time Capital Gains Tax Service that allows investors to report their gains and losses as they happen throughout the financial year.
One of the biggest challenges accountants (and investors) face when calculating crypto taxes is tracking cost basis. Most investors tend to use a variety of exchanges, wallets and blockchains and hold many crypto assets. Tracking the cost basis of each asset, when it’s moved across multiple platforms, and identifying each taxable transaction on each platform is time consuming.
Fortunately, Koinly helps UK accountants and CPAs get their clients crypto taxes done in no time at all.
All Koinly users need to do is connect the crypto exchanges, wallets or blockchains they interact with to Koinly, either via API or by uploading a CSV file of their transaction history. Koinly then gets to work calculating everything necessary to file crypto taxes, using the share pooling accounting method.
Once it’s worked its magic, check your clients’ Koinly account and generate the crypto tax report your client needs to file with HMRC. Koinly can produce a variety of crypto tax reports, based on your clients needs including the Complete Tax Report, Income Tax Report and HMRC Capital Gains Summary Report.
For accountants, Koinly lets you manage multiple clients all from one spot, with a user-friendly platform and amazing support team to help you troubleshoot any issues as you go. Crypto accountants can sign up for a free Koinly account in minutes.
Koinly also helps connect crypto accountants with crypto investors who need help calculating and filing their UK crypto taxes. Our UK crypto accountant directory offers accountants an easy way for clients to find them. Get listed.