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.
Record keeping
Before you begin calculating your crypto taxes you need to make sure you have accurate records of all your transactions in Pounds Sterling. 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.
Average Cost Basis
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.
| Date | Trade | Price | Quantity | Total Balance | Adjusted Cost Basis | Gain (Loss) | |
|---|---|---|---|---|---|---|---|
| (a) | 1st January | Buy | 1000 | 2 | 2 | 1,000 | - |
| (b) | 3rd January | Buy | 3000 | 2 | 4 | 2,000 | - |
| (c) | 6th February | Sell | 4000 | 1 | 3 | 2,000 | 2,000 |
In the above example, you can see how the Adjusted Cost Basis increases from (a) to (b), and a capital gain is realized against this average cost at time (c).
Same Day Rule
Any trades that you make on the same day with the same cryptocurrency are first grouped together before adding the leftover to the average cost basis pool.
| Time | Trade | Price | Quantity | Total Balance | Adjusted Cost Basis | Gain (Loss) | |
|---|---|---|---|---|---|---|---|
| (1) | Jan 2nd 9am | Buy | 500 | 1 | 1 | 500 | - |
| (2) | Jan 4th 9am | Buy | 1000 | 1 | 2 | - | - |
| (3) | Jan 4th 10am | Buy | 3000 | 1 | 3 | - | - |
| (4) | Jan 4th 11am | Sell | 5000 | 1 | 2 | 1,250 | 3,000 |
In this scenario the buy transactions on Jan 4th are grouped with an average cost basis of £2,000 and the sell on the 4th is applied to this daily average cost basis, realising a gain of £3,000. The remaining 1 BTC with an average cost basis of £2,000 is then added to the pool making a new average pool of £1,250.
The same is also true for fees, meaning any fees paid within the same day will also be grouped together.
| Time | Trade | Price | Quantity | Fee % | Fee | |
|---|---|---|---|---|---|---|
| (1) | Jan 5th 9am | Sell | 2000 | 1 | 10% | 200 |
| (2) | Jan 5th 10am | Sell | 2000 | 1 | 20% | 400 |
In this scenario, the two sell transactions both occur on the 5th of January, and each have a different fee rate. Due to the Same Day rule, the fees for these two transactions are grouped, resulting in an average fee rate of 15%. Within Crypto Tax Calculator, the value of the fee shown in the transaction breakdown table will be based on this calculated average fee for all transactions within the same day, rather than the rate for the individual transaction. That is, each transaction will show a 15% fee rate, with the value of the fee being £300 for each, rather than £200 for the first transaction and £400 for the second.
Bed and Breakfast Rule
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 investors would sell their stock on the last day of the financial year 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, and instead rematch the buy and the sell.
Example: Buying back within 30 days
Violation of Bed and Breakfast rule
| Date | Trade | Price | Quantity | Gain (Loss) | |
|---|---|---|---|---|---|
| (1) | 1st January | Buy | 10,000 | 1 | - |
| (2) | 3rd April | Sell | 22,300 | 1 | 12,300 |
| (3) | 8th April | Buy | 24,000 | 1 | - |
We buy 1 BTC with an average cost of £10,000. We then sell the BTC realising a gain of £12,300 in this tax year to maximise the tax free threshold. We then re-buy the BTC in the next financial year, with the new average cost basis being £24,000 per BTC.
Apply Bed and Breakfast rule
| Date | Trade | Price | Quantity | Gain (Loss) | |
|---|---|---|---|---|---|
| (1) | 1st January | Buy | 10,000 | 1 | - |
| (2) | 3rd April | Sell | 22,300 | 1 | (1,700) |
| (3) | 8th April | Buy | 24,000 | 1 | - |
The correct application of the BnB rule matches the re-buy with the sells in the last 30 days. In this case we adjust our gain to a loss of 1,700. Additionally, the average cost basis continues to be £10,000 per BTC.
Mining
Mining has different tax implications depending on whether you are a hobby or business miner. For hobby mining Crypto Tax Calculator 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.
Hard Forks
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.
Airdrops
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 Crypto Tax Calculator, you can classify transactions as an airdrop if it is not considered income, otherwise you can classify the trade as income.
Staking and Interest
The HMRC has recently clarified that staking rewards are taxed as income. Crypto Tax Calculator will separate out staking rewards as income earned. Once you have earned income from staking, the initial value forms the cost basis for your capital gains or loss. In 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.
The information provided on this website is general in nature and is not tax, accounting or legal advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and seek professional advice. Cryptotaxcalculator disclaims all and any guarantees, undertakings and warranties, expressed or implied, and is not liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or incidental or Consequential Loss or damage) arising out of, or in connection with, any use or reliance on the information or advice in this website. The user must accept sole responsibility associated with the use of the material on this site, irrespective of the purpose for which such use or results are applied. The information in this website is no substitute for specialist advice.
Shane Brunette founded CTC back in 2018 after dealing with his own crypto tax nightmare. He has worked closely with accountants and tax lawyers to make it easy for fellow cryptocurrency users to be tax compliant.
