Cryptocurency Tax in the UK - it's tax Jim, but not as we know it

Disclaimer: This is my own interpretation of current UK tax rules. Please seek clarification from a professional before submitting a tax return.

Tax isn’t something we cryptonites (no, it won’t catch on, but there we are) like to think about, but if you ever intend to cash out some of your (hopeful) profits down the line it’s something that it’s best to deal with up front rather than face the knock at the door/letter/email down the line. I’ve read some conflicting information on crypto tax in my research, so I sought to get definite answers which I thought I would share. Please bear in mind, this applies to UK tax only.

First, The bad news

Having spoken to a UK crypto tax specialist yesterday morning I came away realising that what I thought I knew about crypto tax was fundamentally wrong. I had assumed that the tax office would only be interested with what I turned back into FIAT from crypto, and to an extent that is the case, but what I didn’t know was that built into this is the requirement to show your crypto to crypto trades as well. They can’t tax you on this, obviously, but you will need to prove how you got from your initial investment to what you’re cashing out, which you would have done either by trading or by HODLing multiple coins. And you have to account for all those trades.

Just let that sink in.

That’s the headline, the bad news. It’s not that bad really, but it’s not a whole lot better.

HMRC and crypto – a match made in utter confusion

HMRC laid out their policy in their ‘Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies’ paper in 2014. Yes, 2014, and they haven’t updated it – and by all accounts they have no intention of doing so anytime soon, despite the imminent crackdowns recently talked about. In it, they stipulate that crypto taxation comes under one of three bands – Corporation Tax, Capital Gains Tax and Income Tax. I’m not going to go into the details of their differences here, but what I will say is that HMRC is taking each submission of crypto tax on a case by case basis. Why is this important? Because there is a chance that HMRC will see some or all of your actions as gambling, and therefore those gains are tax free. There’s no black and white determination of this, it’s up to HMRC’s interpretation of your activities, but this is why I would suggest enlisting the help of an accountant – they will work on your behalf to try and get the best deal for you, as well as handling any investigations that may arise. In most cases however crypto gains will be seen as a capital gain – i.e. you bought a coin and sold it for a profit at a later date – and so you will be taxed on those gains under capital gains tax rules (check HMRC for your individual tax rate). Don’t get hung up on the value of your crypto portfolio – HMRC are only after a portion of what you have turned into FIAT and how you arrived at that figure. You will only be taxed on the profit you gained upon the sale of a coin, not its value, and you get up to £11,300 tax free each year (capital gains tax only). If you cashed out under £11,300 you probably don’t need to submit a tax claim, but there’s no guarantee there. Again, see HMRC for the whys and wherefores of submitting tax returns. So assume you are going to pay capital gains tax at your individual rate, then anything else will be a bonus.

What you need to do

So, now you know how you’re likely to be taxed on most if not all of your gains, the next step is knowing what to supply to HMRC. This is most likely causing a sweat to breakout on your brow because, like most of us, you’ve given as much thought to record keeping as to the plight of the Great British phone box. All is not lost however. The basic advice is a) don’t panic if you have limited/no records and b) start now. I’ll tackle the first part, what you can do if you haven’t made records, in a minute, but it’s easier to get the second part out of the way first.

Starting now

The way I have chosen to think about this is like stepping stones. Your starting point is your investment and the end goal is the gains you are claiming you have made that you want to pay tax on. In an ideal world you will be able to show the tax man every step you have taken on the way towards your gain (i.e. every single trade linked to what you eventually cashed out), but for people who trade a fair bit this is hard to do. However, this is the best way to avoid a potentially lengthy tax investigation because you didn’t provide enough data, so it really is worth it. So, start tracking your trades using a spreadsheet. It needn’t be anything complicated – I use the below:

This will probably evolve over time, but the main thing you’re trying to show is how much your coins appreciated at the time of sale. It’s also worth reporting any coins sold for a loss, as capital gains losses can be used to offset your final tax bill. And even if they’re not taken off at the end of the day, what’s the harm in trying? At the very least it all helps build a picture of a humble crypto investor just trying to pay his taxes.

You should also get into the habit of taking screenshots of each trade, or obtaining other evidence, to back up your claims. Think of it as claiming expenses at work – without receipts for your various purchases it will be a lot harder to get repaid for them. Obtain proof of as many transactions as you can, ideally all of them (this is covered a bit more below). The more evidence you can provide the easier it is for the tax man to follow your stepping stones from investment to gain. This isn’t easy, obviously, but it’s the only way to go about it – the more the better.

I have no records!

Now for the other 99% of us who have little/no records. The good news is that HMRC almost expects you to be a bit shoddy. By and large they don’t have a clue themselves about crypto, so as long as you can display good intentions and prove you’ve done all you can to get hold of records you should be ok. The advice I received in this matter was two-fold. Firstly, try and retrospectively show evidence for the ‘bigger’ stones – any large gains you made that jumped you up a level in terms of profit. For example, the tax man isn’t bothered about me screwing up and buying and selling ICX six times in two days because that didn’t gain me much, if anything, but he will be interested in the fact that DRGN doubled my portfolio size overnight. That’s a huge appreciation in the value of an asset, so it needs to be accounted for with proof.

Alternatively, if you haven’t experienced such big jumps, the advice was to roughly calculate the value of your portfolio at the start and the end of each month, taking all trades into account. You should still have a record of when you bought crypto for FIAT (unless you bought it on a street corner), so you should be able to roughly chart your journey to the gains you’ve made using CoinMarketCap for historical pricings. That way you’re showing stepping stones of sorts to the tax man. If you’ve divested hugely, as I have, then it promises to be a hell of a task, but the more time you spend on it now the less chance there is of you getting investigated. Again, showing intent to comply is key here. The important thing is to not get bogged down in the complexities. I could spend literally weeks going round in circles chasing up all my trades to prove this or that, or trying to show exactly what trades led me to what portion of my profits, but you’re not expected to do that – you just need to show as best you can that the money you cashed out in the previous tax year was a result of roughly x coins appreciating in value by roughly x amount. HMRC are looking for anomalies, so as long as your stepping stones lead roughly in the right direction and you account for any big jumps, you should be fine. Do the best you can to prove you not trying to cheat them.

The proof is in the JPEGs

Ok, so how do you prove what you traded and when? Logging your trades is a good start, but of course to an HMRC inspector you could be making the whole thing up – think back to our expenses analogy. So you need receipts. Except you don’t get any in crypto. Except you do…sometimes. One of the reasons we love blockchain is the fact that every transaction is on record forever…so all we need to do is find them. If you’ve ever bought on Etherdelta, or a similar exchange, then all your trades are logged on the Ethereum blockchain. You can go to https://ethplorer.io/ or https://etherscan.io, pop in your Etherdelta address and you will see all your transactions. Open up your chosen transaction, take a screenshot, snippet or whatever or the trade and save it on your computer. A word of warning though – don’t get caught up on the dollar value of the trade if one is shown, as this is the current dollar value of the trade given the price of ETH right now, not the value of the trade at the time. So you need to find the price ETH was at the time of the trade and you have your capital expenditure for that coin. You don’t need to do this for all your purchases, just those you have sold for profit.

When it comes to other exchanges like Binance, KuCoin etc., you might not have access to such detail regarding each trade and instead all you have is a basic trade history. The best you can do here again is take snippets/screenshots of the trades you are reporting and try to work out the value of the trade in GBP. Binance allows you to download up to 3 months of trades, but this is only in Excel form which, while the sheer volume may be a good way of blinding the tax man with figures, can be easily manipulated by even a novice tax cheat. Again, screenshotting and saving is very long winded and might not end up proving anything in and of itself, but showing willing and a basic pathway from investment to gain is what we’re after. This is why an accountant/tax adviser is invaluable – they can help steer you so you don’t waste your time.

All we need is a great big melting pot…

Have you ever seen ‘product of more than one country’ on the back of a jar of honey? If you were to open up that jar of honey, would you be able to divide its contents up into the respective countries of origin? No, because it’s all mixed in and impossible to separate. Welcome to almost all of our Bitcoin stacks. When it comes to cashing out portions of your Bitcoin which you’ve spent years diligently adding to at various stages of its price, here’s the advice I received:

*‘In very simple terms it will be a question of apportioning the original cost of your investment across your various cryptocurrencies – this will effectively be the ‘base cost’ you deduct from any gains.

If you have apportioned your ‘base cost’ in a reasonable manner, which is obvious from your computations and there aren’t any obvious anomalies in how the cost has been allocated to your gains there is no reason why this shouldn’t be accepted by HMRC. (The following part relates to me personally) In any event your base cost is relatively modest (£3k) so you wouldn’t be looking at any material inaccuracies in how the cost was allocated if it was not possible to trace all the historical transactions.’*

So it goes back to what we already know – as long as the profits you’ve made are in keeping with your original investment and the price action of, in this example, Bitcoin, you should be ok.

Mine, all mine

When it comes to mining crypto (and airdrops/bounties/masternode payouts etc.), this is even less clear– it might come under additional working income, it may be classed as trading. However, the recommendation is the same – keep records. If you’ve already sold some, try to find out how much you sold them for. If you’re HODLing, keep records of how many you have and their current value (for free coins it can’t hurt to record their price at the time of arrival too). You also may be able to claim back the electricity you’ve used in mining, so try to find out how much electricity your rig uses and keep a log of that too.

To summarise

Unless you’ve been diligently keeping records ever since you’re first foray into crypto, you have a fair bit of work ahead of you if you a) intend to cash out at some point and b) want to avoid looking over your shoulder for the tax man. Naturally there are a multitude of complicating factors and other scenarios I can’t even begin to cover here, mainly because I’m just like you and I’m not a tax accountant, but the golden rules to follow are:

Show willing – pretend you want to pay tax and demonstrate this
You don’t have to account for everything, you just need to help the taxman along your profit path as much as possible
Keep records from right now of all trades you make
Find an accountant who knows a bit about crypto and seek their advice/use their services.

I hope you’ve found this info useful. As I said, each tax submission is on a case by case basis, so there really is no telling what will happen in individual cases as everything is open to interpretation. What we’re trying to do though is avoid the faff of further investigation, so tell the truth and get hold of as much info as you can. Please feel free to ask questions, although I can’t promise to have the answers!