How to calculate your UK crypto tax

Calculating cryptocurrency in the UK is fairly difficult due to the unique rules around accounting for capital gains set out by the HMRC. To calculate your capital gains as an individual, the HMRC requires you to keep track of your average cost basis for the token on hand, aggregate your same-day transactions, and ignore any “wash sales”. This is to discourage people from trying to partake in tax loss harvesting to minimise their taxes below the capital gain tax free threshold. In this guide we discuss these rules in greater detail and how they apply to cryptocurrency.

Before you begin calculating your crypto taxes you need to make sure you have accurate records of all your transactions in Pound Sterlings. So if you are trading on international exchanges you need to value these transactions in GBP using a consistent manner, such as by cross referencing rates on a local exchange. You will also need to record the type of cryptocurrency; the date of the transaction; if they were bought or sold; the number of units; cumulative total of the investment units held; and bank statements/wallet addresses in case of an audit.

Unlike other parts of the world, the HMRC uses an average cost basis to calculate the cost on capital gains. For example, if you buy 1 BTC at £1,000 and a second BTC for £3,000, your average cost would be £2,000. 

DateTradePriceQuantityTotal BalanceACBGain (Loss)
(a)1st JanuaryBuy1000221,000-
(b)3rd JanuaryBuy3000242,000-
(c)6th FebruarySell4000132,0002,000

In the above example, you can see how the ACB increases from (a) to (b), and a capital gain is realised against this average cost at time (c).

Any trades that you make on the same day with the same crypto currency are effectively treated as the same transaction. So if you make multiple transactions of say BTC on the same day, we only consider the sum of all these transactions.

TimeTradePriceQuantityTotal BalanceACBGain (Loss)
(1)10amBuy1000221,000-
(2)11amBuy3000242,000-
(3)3pmSell5000132,000-

We first buy 2 BTC with an average cost of £1,000 each. We then buy 2 more BTC at a price of £3,000, lifting the average cost to £2,000 each. In the afternoon we sell one BTC for £5,000. In total we are left with 3 BTC at a total price of (£1,000 2) + (£3,000 2) - (£5,000 * 1) = £3,000. This means our average price of BTC for the day was £1,000 and we can add 3 BTC to our Section 104 holdings.

To avoid people taking advantage of the average cost basis, and tax free threshold, the HMRC introduced the bed and breakfast rule, named after a tax loss harvesting strategy where sneaky investors would sell their stock on the last day of the financial year for a loss, and buy it back the next day. This rule essentially states that if you buy back the cryptocurrency within 30 days of its disposal, you will “void” the capital gains event previously associated with this transaction.

Example: Buying back within 30 days

Violation of Bed and Breakfast rule

DateTradePriceQuantityTotal BalanceACBGain (Loss)
(1)1st JanuaryBuy5000225,000-
(2)3rd FebruarySell3000200(4,000)
(3)4th FebruaryBuy3000223,000-
(4)Next yearSell10,00020014,000

We buy 2 BTC with an average cost of $5000. We then sell 2 BTC realising a loss of $4000 in this tax year. We cleverly rebuy the 2 BTC with the hope of selling this for a gain in the future, and use the capital loss to maximise our current purchasing power. We quit work and go travelling, thereby minimising our overall tax bill.

Apply Bed and Breakfast rule

DateTradePriceQuantityTotal BalanceACBGain (Loss)
(1)1st JanuaryBuy5000225,000-
(2)3rd FebruarySell30002000
(3)5th FebruaryBuy3000225,000-
(4)Next yearSell10,00020010,000

The important thing to note here is that (1) does not realise a capital loss. Instead the original ACB is reapplied from (1) to (3) and the loss of $4,000 is realised in (4) bringing the overall gain down to 10,000.

Mining has different tax implications depending on whether you are a hobby or business miner. For hobby mining CryptoTaxCalculator will calculate your initial cost basis as the market value when receiving the reward. This market value is also treated as income by the HMRC. More on mining can be found here

Forking essentially creates a new cryptocurrency that will go into its own holding pool. The cost basis of the forked cryptocurrency is calculated based on the crypto assets already held by the individual. More on forks can be found here.

The HMRC only considers airdrops as income tax if you did something to “earn” the reward. When you sell the airdrop, the cost basis is the market value at the time of receiving the airdrop reward. However if you did something to “earn” the airdrop, then the HMRC considers this miscellaneous income for tax purposes. It is unclear exactly where this border lies, but for example, if you received UNI for trading on Uniswap, then this could potentially be classified income, since you did have to do something to receive this reward. You should talk to your accountant about your individual circumstances. More can be found here.. In CryptoTaxCalculator, you can classify transactions as an airdrop if it is not considered income, otherwise you can classify the trade as income.

The HMRC has not yet clarified how staking is taxed. However we can look to other regions and similar instruments to get an idea of the most likely scenario. Staking itself is very similar to depositing money into the bank and earning interest, so at CryptoTaxCalculator our software will separate out staking as income earned. You can then talk to your accountant about how to correctly categorise this, or reach out to the CRA for an individual assessment. Once you have earned income from staking, this initial price forms the cost basis for your capital gains or loss. This way you are not “double taxed”. For example if you receive $10 of ETH for staking, and later sell the ETH for $100, your income is $10 and your capital gain is $90.

Lending involves loaning out cryptocurrency and usually being compensated in the form of interest. Similar to staking, we treat interest earned as income. You also need to be careful because if you disposed of the cryptocurrency by receiving another token this could arguably trigger a taxable event. Make sure you check with your accountant before you unknowingly increase your tax burden.

All content in this article is general information only and does not constitute financial, tax or legal advice. It is not intended to be used by anyone for the purpose of financial advice, legal advice, tax advice, tax avoidance, promoting, marketing or recommending to any other party any matter addressed herein. For tax, financial or legal advice please consult your own professional.

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