The taxation of cryptoassets
Individuals investing in cryptoassets may have to pay capital gains tax when you dispose of cryptoasset exchange tokens (known as cryptocurrency). There may be an exception if you trade with such frequency to consider it a trade; the disposal would instead be subject to income tax, but this will not be typical.
You pay Capital Gains Tax when your gains from selling certain assets go over the tax-free allowance. For the current 2021/22 year, the tax-free allowance is £12,300.
You might need to pay other taxes if you receive cryptoassets.
WHEN TO CALCULATE YOUR GAIN OR LOSS ON DISPOSAL
You might need to pay Capital Gains Tax when you:
- sell your tokens
- exchange your tokens for a different type of token
- use your tokens to pay for goods or services
- give away your tokens to another person (unless it’s a gift to your spouse or civil partner). Note that the gifted value is deemed to be the market value at the date of gift even if you did not actually receive anything for them.
If you donate tokens to charity, you may need to pay Capital Gains Tax on them.
There is no disposal if you are just moving tokens between wallets that you own.
HOW TO REPORT AND PAY YOUR CAPITAL GAIN ON CRYPTOASSETS
If you need to report and pay Capital Gains Tax, you can either:
- complete a Self-Assessment tax return at the end of the tax year
- use the Capital Gains Tax real time service to report it straight away
The amount of tax due might be different if you are not a resident in the UK.
If you complete a tax return, you must complete it in pound sterling.
Records you must keep
You must keep separate records for each transaction and balance. The main tax point are purchases and sales. Please be warned that the exchange sites may only keep these records for a short period of time – the onus is on you to keep your own records. These must include:
- type of cryptoasset
- date of transaction
- if they were bought or sold
- number of units
- value of transactions in sterling (£) on that day
- cumulative total of the investments held
- bank statements and wallet addresses
- a record of the pooled costs before and after you disposed of them
HMRC might ask to see your records if they carry out a compliance check.
WORK OUT IF YOU NEED TO PAY TAX ON YOUR CRYPTOASSETS
To check if you need to pay Capital Gains Tax, you need to work out your gain for each transaction you make. The way you work out your gain is different if you sell tokens within 30 days of buying them.
Your gain is normally the difference between what you paid for an asset and what you sold it for. If the asset was free, you’ll need to use the market value when working out your gain.
You do not need to pay Capital Gains Tax on the value of the tokens that you’ve already paid Income Tax on. You’ll still need to pay Capital Gains Tax on the gain you make after you have received them.
You can deduct certain allowable costs, including a proportion of the pooled cost of your tokens when working out your gain.
You can also use capital losses to reduce your gain, but you’ll need to report them to HMRC first.
If your total taxable gain is above the annual tax-free allowance, you must report and pay Capital Gains Tax.
What counts as an allowable cost?
You can deduct certain allowable costs when working out your gain, including the cost of:
- transaction fees paid before the transaction is added to a block chain
- advertising for a buyer or seller
- drawing up a contract for the purchase and sale of the tokens
- a valuation or apportionment so you can work out your gain for that transaction
You can also deduct a proportion of the pooled cost of your tokens.
You cannot deduct costs:
- you’ve already deducted against profits for Income Tax
- of mining activities (like equipment or electricity)
The likelihood is, the majority of the above will not apply to your regular crypto trading other than original cost and maybe the accountancy fees for helping you work out your gain.
The main cost will be the fees charged on your exchange – some of these are allowable and some of them are not. Below is a table of the common fees and their tax treatment:
| Swap sterling for another currency (if you can’t buy your token in £) | Allowable |
| Swap other currency into sterling | Allowable |
| Deposit any currency into the exchange | Not Allowable |
| Purchasing Tokens | Allowable |
| Disposal of tokens | Allowable |
| Withdrawing currency | Not Allowable |
If you exchange one token for another, there may be one fee that relates to token A or token B.
If this is the case, you would apportion the fee between the two assets.
Pooling the cost of your tokens
You must group each type of token you own into pools of the same type even if you acquired them on different dates and at different prices. You then work out a pooled cost for each type of token.
When you sell tokens from a pool, you can deduct an equivalent proportion of the pooled cost (along with any other allowable costs) to reduce your gain.
Working out the pooled cost is different if there has been a hard fork in the blockchain.
You’ll need to work out the pooled cost every time you buy or sell tokens.
When you buy tokens, add the amount you paid for them to the appropriate pool. When you sell them, deduct an equivalent proportion of the pooled cost from the pool.
You must keep records for each pool.
If you buy and sell tokens of the same type
Do not group tokens into pools if you buy them:
- on the same day that you sell tokens of the same type
- within 30 days of selling tokens of the same type
If you bought new tokens of the same type within 30 days of selling your old ones, the rules for working out the cost are the same as the rules for shares.
EXAMPLE
You acquired Bitcoin, Ethereum and PolkDot and therefore would have three token pools.
When you pool your tokens, the purchase price becomes the average for the whole pool. Your pools for the following transactions would be:
| Transaction Date | Transaction | Units | £ per Unit | Total Cost |
| 01/01/2020 | Bitcoin purchase | 5 | 25 | £125 |
| 25/05/2020 | Ethereum purchase | 20 | 15 | £300 |
| 01/07/2020 | Bitcoin purchase | 10 | 30 | £300 |
| 31/07/2020 | PolkDot purchase | 100 | 10 | £1,000 |
| 28/11/2020 | PolkDot purchase | 50 | 12 | £600 |
Bitcoin pool 15 units average cost per unit £28.33
Ethereum pool 20 units average cost per unit £15.00
PolkDot pool 150 units average cost per unit £10.67
You proceed to sell the following tokens:
| Transaction Date | Transaction | Units | £ per Unit | Total proceeds |
| 01/12/20 | Bitcoin sale | 5 | 50 | £250 |
Your gain calculation would look something like this:
Proceeds £250.00
Less Cost (5 units x £28.33) £141.65
Gain £108.35
As with all rules there are some exceptions – don’t get caught out!
- The ‘Same Day Rule’
Where you buy and sell the same type of token on the same day,
- all tokens shall be treated as acquired in a single transaction
- all tokens disposed of shall be treated as disposed of in a single transaction
The tokens purchased will therefore be matched with the tokens sold, where possible, so that those tokens are not added to the pool.
- The ‘30 Day Rule’
If you dispose of a token and then acquire the same type of token within the next 30 days, then
- the same day rule applies as above as priority
- the purchased tokens are matched with the earliest sales within the 30 days and are not added to the pool
- If the quantity of tokens purchased exceed the number sold in the 30 preceding days, the excess tokens are added to the pool.
We’re here to help you.
If you would like to discuss your investments or to discuss your tax affairs in more details please contact us on:
T: 01633 815800
Email: help@hsj.uk.com