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3-minute read
Sam Bromley
9 November 2022
HMRC applies tax on cryptocurrency, so you need to know how to report it on your Self Assessment.
Download your free in-depth guide to reporting cryptocurrency on your tax return. Get instant access to expert hints and tips in the click of a few buttons.
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Cryptocurrencies are decentralised digital currencies that don’t rely on banks or central authorities to record transactions and issue new units.
Transactions are recorded through distributed ledger technology (of which blockchain is the best known). This prevents a unit from being used twice and enables data to be shared globally.
The blockchain is distributed across an entire digital network, which anyone can be a part of. As it’s decentralised, no party has overall control over it.
Well-known cryptocurrencies include Bitcoin, Ethereum and Litecoin.
Many people buy and sell cryptocurrency as an investment, which means that HMRC views cryptocurrency as an asset (it doesn’t recognise it as currency or money). You’ll need to pay capital gains tax on the profit you make.
But because the market is new, cryptocurrency tax rules have evolved rapidly.
As above, Bitcoin is a digital currency that you can trade online without the need for banks or other centralised institutions.
Bitcoin is the first digital currency that became widely used. This means that when thinking about cryptocurrencies, Bitcoin will be the first that springs to mind for many.
You can trade Bitcoin as an investment, but you can also pay with it at certain retailers.
Bitcoin has been notoriously volatile as an investment. The media has both hyped and slated the cryptocurrency, contributing to its elevation in the public’s consciousness.
If you buy and ‘dispose’ of cryptocurrency as a personal investment, you’ll pay capital gains tax on the profits you make.
HMRC refers to cryptocurrency units as tokens. It says that disposal is a broad term that includes:
The capital gains tax rates for disposing cryptocurrencies are:
The tax-free allowance for capital gains tax is £12,300.
Your gain is usually the difference between how much you paid for an asset and what you sold it for. You pay capital gains tax on your gains above the tax-free allowance.
There are some cryptocurrency-specific ‘allowable costs’ that you can deduct from your gain, including:
You can’t deduct costs if you’ve already done so against profits for income tax, or for the cost of mining activities (like equipment or electricity).
It’s also important to get to grips with HMRC’s ‘pooling’ concept. While HMRC says that this ultimately makes it easier to work out what tax on cryptocurrency to pay, it can be a complex topic.
When working out your gain, you group each type of token into a pool, which is also what you need to do for regular investments in a single company.
But you don’t group tokens into pools if you buy them on the same day that you sell tokens of the same type, or within 30 days of selling tokens of the same type.
Find out more about cryptocurrency pooling and capital gains tax in HMRC’s manual.
You report gains on cryptocurrency on your annual Self Assessment tax return.
You can also use HMRC’s real-time capital gains tax reporting service. Remember that gains are reported in pound sterling.
As usual, it’s important to keep accurate records for your taxes, which includes your cryptocurrency activity too. HMRC says this means the:
If you’re not sure about anything, speak to HMRC or a professional adviser.
The above information is for Self Assessment taxpayers who buy and dispose of cryptocurrency as an individual.
However, some businesses and companies may be carrying out activities involving cryptocurrencies, including:
If your business does any of these, various taxes may apply, including:
You’ll have to report tax on your Self Assessment tax return or your company tax return.
HMRC’s detailed cryptoassets manual has more on the tax treatment of business activities that involve cryptocurrency.
But as this is a complex topic, it may be best to get professional advice.
Would you like us to write about any other cryptocurrency topics? Let us know in the comments below.
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