Millions of Brits investing in bitcoin and other cryptocurrencies have been cautioned that they could face penalties if they don’t declare profits to the tax authority.
HMRC issued a fresh warning on social media as crypto markets continued their volatile journey of dramatic surges and plunges, reminding traders that earnings can result in a tax liability. In a post on X, HMRC cautioned: “Any gains count towards your Capital Gains tax-free allowance of £3,000 a year.”
When tax becomes payable
According to the regulations, traders may be liable for Capital Gains Tax (CGT) if they make a profit when they ‘dispose’ of cryptoasset tokens such as bitcoin, XRP or ether.
Disposals include:
selling crypto. exchanging one type of crypto for another. using crypto to pay for goods or services. giving crypto to another person (unless it is a gift to a spouse, civil partner or charity).
Traders must work out their total profits across the tax year (April 6 to April 5). If overall profits surpass the £3,000 CGT annual exempt threshold, they must notify HMRC and pay tax.
The £3,000 allowance applies to the current tax year. Profits beyond that limit are taxed at CGT rates, depending on the person’s overall income and the asset type. HMRC also clarifies that other taxes may be applicable in certain situations – for instance, Income Tax may be owed if cryptoassets are received as employment income. How profits are calculated.
In most instances, the profit is the difference between what you paid for the tokens and what you sold them for. Nevertheless, special regulations apply in certain scenarios, including transfers between ‘connected persons’.
Investors can subtract allowable expenses, including:
transaction fees. advertising costs for a buyer or seller. drawing up contracts. valuation costs. a proportion of the pooled cost of tokens.
However, certain expenses cannot be subtracted, such as mining costs like equipment or electricity. A central element of the system is ‘pooling’. Investors must group each type of token into a pool and work out an average cost.
How this works
If an investor purchases 100 tokens at £2 each (£200 total) and subsequently buys 300 more at £1 each (£300 total), they own 400 tokens costing £500 in total – an average of £1.25 per token. If they then sell 200 tokens, the cost used for the tax calculation would be £250 (200 × £1.25). This is subtracted from the sale proceeds to work out the profit.
However, tokens purchased on the same day as a sale – or within 30 days – are not pooled and instead follow share matching regulations outlined in HMRC’s Helpsheet HS284.
Maintaining records is crucial
HMRC warns investors must keep comprehensive records for each pool of tokens, including:
the type of tokens. dates of disposal. number of tokens sold. number remaining. value in pounds sterling. bank statements. pooled costs before and after disposal.
Whilst certain crypto exchanges offer transaction reports, HMRC emphasises these “are not tax calculations” and “will not keep track of your pooled costs”.
How to report
If tax is owed, investors can report and pay either by:
completing a Self Assessment tax return. using the Capital Gains Tax real-time service.
From the 2024-25 tax year onwards, there is a dedicated cryptoasset section on the Self Assessment return.
Official guidance on if you need to pay tax when you sell cryptoassets can be found here. Those who need to disclose unpaid tax for earlier years can use HMRC’s Cryptoasset Disclosure Service here.
