Cryptocurrency – how is this taxed?

Cryptocurrencies are electronic cash designed to stand apart from any government or bank as they work through a computer network. Records that confirm individual ownership, are stored in a digital ledge. The coins can be bought or sold, used to purchase goods (if sellers accept cryptocurrencies), used for investments in various assets or as investments themselves.

The downside of cryptocurrency is that the whole system is unregulated and has no central bank or government to support this currency when something goes wrong.

The cryptocurrency was not accepted quickly. However, in April 2022 HMRC announced a decision to recognise one type of cryptocurrency called Stablecoins as a valid form of payment. This is a part of wider plans to make Britain a global hub for crypto-asset technology and investment. These coins are intended to maintain a relatively stable value typically pegged to a currency. 

Tax charge

The HMRC published the Crypto-assets Manual which outlines their view of the tax position. It confirmed that in the majority of circumstances the investment will be subject to Capital Gains Tax on disposal. 

However, Income Tax and National Insurance contributions will be charged on crypto-assets received from:

• an employer as a form of non-cash payment;
• mining, transaction confirmation or airdrops; or
• where the individual runs a business carrying on a financial trade in crypto assets – to be deemed as taxable trading profits.

Capital Gains Tax will be relevant on the following disposals:

• Selling for any other currency;
• Exchanging different types of tokens;
• Paying for goods and services;
• Gifting (unless to a spouse or civil partner).

There will be transactions where there will be no CGT disposal e.g., if an owner moves tokens between “wallets” such that no transaction takes place as the owner retains beneficial ownership.

Allowable expenditure

Some costs on disposal can be deducted. They include:

• transaction fees paid for having the transaction included on the distributed ledger;
• advertising for a purchaser or a vendor;
• professional costs to draw up a contract for the acquisition or disposal of the tokens; and
• costs of making a valuation or apportionment.

How to calculate your costs

HMRC has precise guidance for crypto cost basis methods. Unless the token can be identified with the sale of particular tokens, then HMRC requires the ‘pooling method’ to be used. 

There are three possible methods of calculation:

1.     Same-Day: matching purchases and sales of the same day.

2.     Bed and Breakfast: matching sales within 30 days of purchase (first in first out basis).

3.     ‘Pooling’: if the two rules above are not relevant, then the pooling method needs to be used. The cost of any coin is calculated by adding up the total amount paid for all assets and dividing it by the total amount of tokens held to find the value per token. The pool is an aggregate of all the acquisitions which are not sold within the subsequent 30 days. Therefore, an average cost for the crypto assets in the pool is maintained and a pro-rata cost is deducted from disposals using the matching rules.