There is currently no specific law that determines how cryptoassets (bitcoin and similar) and decentralised finance (DeFi) transactions should be taxed, but that doesn’t mean any profit made is tax-free. It is subject to tax either as sundry income or as a capital gain.
HMRC does not consider cryptocurrencies such as Bitcoin to be a form of money or currency, so the special tax rules that apply to holding and lending real money do not apply to any cryptoassets. Where cryptoassets are lent or ‘staked’ (lent to a platform that then lends on to various borrowers), the return provided to the asset owner is not interest, so it is not covered by the tax-free allowances for interest.
HMRC are clear that most dealing in cryptoassets does not amount to a trade, so when a transaction results in a profit, that is a capital gain. Any losses created will be treated as capital losses, which can only be set off against capital gains.
However, there are serious practical issues when trying to apply HMRC’s approach to the thousands of crypto transactions that can be undertaken by one person in a single day.
HMRC expect you to keep the following data points for each crypto transaction:
- the type of cryptoasset
- date of the transaction
- if they were bought or sold
- number of units involved
- value of the transaction in sterling, at the date of the transaction
- cumulative total of the investment units held
- bank statements and wallet addresses, in case these are needed for an enquiry or review.
To calculate the capital gains and losses from your cryptoassets, you need to extract the above data for each individual transaction from the various exchanges and digital wallets you use and compare the buy and sell price for each asset.
If your total net gains from cryptoassets, plus any net gains from other assets, are less than your annual capital gains exempt amount (£12,300), you will not have a CGT liability for the year; however, first you need to calculate what your crypto gains or losses are for each tax year.
If you have been dabbling in cryptoassets, we need to have a serious talk about the taxation of those transactions.