Cryptocurrencies are a form of digital or virtual money secured by code and are not controlled by any single bank or government. You may have heard of the most common ones: Bitcoin, Ethereum, or Solana.
Whether you currently hold crypto or are looking to purchase some in the future, it’s vital to know exactly what records you need to keep. This ensures your advisor has everything necessary to accurately calculate any income, Capital Gains (or Losses), and resulting tax liability.
Why do we need this information? (the importance of cost basis)
When you sell or otherwise dispose of a cryptocurrency, we must establish the correct cost basis (the original value used to acquire the coin) for that specific coin.
This is critical because an accurate cost basis dramatically affects the calculated gain or loss recorded for that disposal, and ultimately, the amount of Capital Gains Tax (CGT) you may have to pay.
What type of transactions must I report?
You are required to report transactions that are deemed as a Disposal for tax purposes.
1. Acquisition – no disposal to report, but essential to record. Cryptocurrencies are first acquired when you purchase, are rewarded, or receive them via an airdrop. This process of acquiring a coin does not require immediate reporting because you are acquiring, not disposing.
- However, this is the most important data to keep! The details of this acquisition (the date and the cost/value) form the foundation of your cost basis, which is used later when you dispose of the coin.
2. Holding – throughout the term you hold a coin, there is no action required for tax purposes (despite market movements). A gain or loss is only recognised when a coin is disposed of.
3. Disposals – the taxable events. HMRC has detailed a list of transactions that they deem as disposal for Capital Gains Tax purposes:
Selling for fiat – the most obvious being when a coin is sold, and you receive fiat currency (e.g., GBP, USD) in your exchange/wallet.
Swapping/Trading – when a coin is swapped or traded for another (e.g., Bitcoin for Ethereum). Even though no fiat is involved, this is still considered a disposal of the first coin.
- Gifting – gifting coins to another individual or company. Despite not receiving money, the market value of the coin at the time of the gift will be used to calculate your gain.
- Spending – spending coins to pay for goods or services (e.g., buying a coffee with Bitcoin).
- DeFi Lending/Staking (Beneficial Ownership Loss) – If you provide your tokens into a lending or staking protocol and, as a result, lose beneficial ownership, this is counted as a disposal. [Clarity added below]
Important note on dry tax charges – this last point may be considered the most challenging because, as with gifting, you haven’t received cash from the disposal. Any CGT calculated on the gain is known as a dry tax charge (meaning you have no immediate funds from the transaction with which to pay the tax). The government is currently looking into possible legislative changes to mitigate this issue, but for now, the rules remain complex.
What records should you keep?
We need a full transaction history from every platform you have used. Most wallets and exchanges have the option to print or export comprehensive transaction lists (usually CSV files). These reports should detail all the value, coins, and dates we need to accurately calculate gains/losses on disposals and any other income received from staking, lending, etc.
- The Golden Rule – keep all historic purchase/acquisition/movement reports safe and ready for your advisor.
Consider portfolio tracking software
If you deal with a high volume of transactions (e.g., more than 50 movements a year), you will likely benefit from connecting your wallets and exchanges to a portfolio tracking software.
- Examples – Koinly and Recap.
- Benefit – these services, while requiring an annual subscription, automatically aggregate and categorise every crypto activity and calculate gains/losses according to UK rules.
- Cost vs. Benefit – while this is an extra cost, in the long run, if you have a high volume of activity, paying a professional to manually reconcile and calculate thousands of individual transactions will be significantly more costly and time-consuming.
Other notes
We understand that cryptocurrencies and tax are complex areas, and we would like to stress that as likely and easy it is to just ignore and sort out in the future, it is vital you are on top of your tax compliance for cryptocurrencies. Please get in touch for a quick call if you have any concerns about your current position.
