Accountant’s UK Crypto Tax Guide
As crypto continues to move closer towards mainstream adoption, thousands of UK crypto investors are now looking for an accountant experienced in the crypto market to help them navigate their tax obligations. While HMRC has released extensive guidance on the tax implications of cryptocurrency, for many UK crypto investors, the guidance remains unclear. We’ve got everything you need to know in our UK Accountant’s Crypto Tax Guide.
Want to dip your toe into NFTs, DeFi, the metaverse and cryptocurrencies - but need help with the jargon and technology? You’re not the only one.
Crypto accountants in the UK are in demand, but a lack of understanding of crypto has traditionally put off many accountants. However, from a tax perspective, HMRC has excellent guidance on various crypto transactions - and it’s nothing most accountants haven’t tackled before.
To get you started, we’ve compiled our Accountant’s Guide to UK Crypto Tax, packed with the latest guidance from HMRC. But we also have many other helpful resources from Koinly Crypto Tax Academy that 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.
In addition, if you want to help your client better understand their crypto tax obligations in the UK, we have our UK Crypto Tax Guide.
With all that out of the way, let’s jump in.
How popular is crypto in the UK?
According to recent data from an HMRC study, as of July 2022, almost 14% of Brits own crypto or approximately 7-8 million people.
The same research found over 7% of these investors have more than £5,000 invested in crypto. 69% of crypto investors in the UK are male, while 31% are female.
Many of these investors are and will continue to seek assistance in navigating the complexities of crypto taxation within the UK.
How does HMRC view cryptocurrency?
HMRC has extensive guidance on the tax implications of cryptocurrency in their “cryptoassets” manual, but here’s a quick ten-point summary:
- Cryptoassets (also known as digital assets, tokens, crypto or cryptocurrency) are cryptographically secured digital representations of value or contractual rights 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 depends on the token's nature and use.
- Cryptoassets may be subject to Capital Gains Tax or Income Tax, depending on the specific transaction.
- Individuals must 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 NFTs.
- HMRC has guidance on DeFi lending and staking. The tax implications revolve around whether an investor retains beneficial ownership of their tokens and whether they receive a token in return for capital.
Crypto Advice for Accountants
Adding or offering crypto tax solutions and consultancy isn’t just about lodging annual tax and income returns. It’s also about providing service to crypto clients year-round. Koinly can be used as a crypto portfolio tracker as well as a crypto tax tool. As an accountant, you can see all your crypto clients from one single dashboard, making it easy to track your clients' investments and help them optimise their tax opportunities and provide much-needed crypto advice.
Rather than sifting through spreadsheets and pages of transactions manually, Koinly allows you to help your clients integrate crypto trades from over 700+ of the top exchanges, wallets and blockchains - saving you and your clients hours of time.
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 one cryptoasset for a different cryptoasset (including stablecoins and NFTs).
- Spending crypto to purchase goods and services.
- Giving or gifting crypto to someone, excluding 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 the Income Tax band the investor falls into.
The government’s most recent budget revealed it would cut this allowance in the 2023-2024 tax year and again in the 2024-2025 tax year. From April 2023, the allowance will now be £6,000; from April 2024, it will halve again to £3,000.
We’ll look at examples of this a little later in this guide.
Share pooling cost basis method
As with general property accounting, to calculate a gain or loss, we first need to know the property's cost basis.
HMRC has 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 sells more than they bought that day, move on to 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 purchased within this month, move on to the final rule.
- Section 104 Rule: If the above two rules don’t apply to 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.
Find out more in our share pooling crypto UK guide.
With the basics covered, let’s look at some examples of common transactions and their 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 such as Coinbase, Binance, Crypto.com and Gemini. They may also sell directly from their non-custodial wallets, such as a MetaMask wallet, Ledger or Trezor device via decentralised, 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. Therefore a capital gain or loss must be calculated.
To calculate the gain or loss, take the asset's cost basis and subtract it from the sale price.
Let’s take a look at a couple of examples.
Example 1
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 asset's cost basis 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 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.
Example 2
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. Suppose the client has already offset their capital gains enough to reduce their net capital gain to the £12,300 allowance. In that case, they may carry forward their capital loss to offset against gains in future financial years.
Swapping crypto for crypto
Some crypto investors may be unaware that exchanging one crypto for another is a disposal in the eyes of HMRC, with a capital gain or loss applying to the transaction.
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.
Example 1
A client uses the 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 initially 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 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.
Example 2
HMRC has made it 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 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 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 and potentially additional rewards. How these earnings are paid out is key to the nature of the transaction. These earnings are often 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.
Example 3
Although 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 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; 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 spend crypto at any major store easily.
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.
Example
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 several ways investors can earn new tokens or coins, including:
- Mining crypto as part of a Proof of Work consensus mechanism.
- Staking crypto as part of a Proof of Stake consensus mechanism or staking crypto via third parties or DeFi protocols to earn a reward.
- Liquidity mining and yield farming - if the DeFi protocol works in such a way that new tokens are paid out instead of, or as well as, LP tokens.
- Getting paid in cryptocurrency - from an entire salary, part of a salary, through to tips. This is known as 'money's worth', and National Insurance contributions may also apply.
- Loaning crypto to earn interest via centralised exchanges or decentralised lending protocols (if new tokens are received and the investor no longer has beneficial ownership).
- Creating and selling NFTs in a manner that constitutes business activities.
- Engaging with earning platforms like play-to-earn games, learn-to-earn programs, ads-to-earn browsers and more - depending on the scale of your earnings.
Let’s look at a few examples of Income Tax on crypto.
Example 1
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.
DeFi staking, however, 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.
Example 2
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 deposits their SLP tokens 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 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 accrues 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. Still, HMRC’s crypto asset manual has excellent guidance on DeFi tax implications.
How crypto accountants can help investors
From helping clients optimise their taxes before the financial year's end 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 an 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 and 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 are 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, their investments and whether they’re filing as an individual or a business. However, in general, clients will need the following:
- Self Assessment Tax Return. For anyone self-employed (as a sole trader) and earning more than £1,000.
- Self Assessment: Capital Gains Summary. For anyone who has capital gains or losses to file.
The Real-Time Capital Gains Tax Service allows investors to report their gains and losses as they happen throughout the financial year.
The best crypto tax tool for UK accountants
One of the most prominent challenges accountants (and investors) face when calculating crypto taxes is tracking cost basis. Most investors 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 quickly and easily.
All Koinly users need to do is connect the crypto exchanges, wallets or blockchains they interact with to Koinly via API or by uploading a CSV file of their transaction history. Koinly then calculates 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 client’s needs, including the Complete Tax Report, Income Tax Report and HMRC Capital Gains Summary Report.
For accountants, Koinly lets you manage multiple clients from one spot with a user-friendly platform and an amazing support team to help you troubleshoot any issues. 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 today!
