- The financial year just ended in the UK, which means crypto traders need to start thinking about tax
- Crypto tax is a minefield, but there are steps you can take to ease the burden
- Crypto tax is best handled by a professional, but they are in high demand
The tax year in the UK finished yesterday, which means that thousands of crypto traders will be (or should be!) preparing their tax returns and potentially declaring their best gains since 2017. Crypto tax is a tricky affair to say the least, so here are six key things you should bear in mind before filing your crypto tax return.
Every Transaction Counts
Before HMRC set out clear guidelines on the matter, the consensus was that only crypto-fiat transactions were taxable. Not any more (in fact this technically never was the case). HMRC’s guidance is now very clear – every transaction you make, be it crypto-crypto or crypto-fiat, is taxable. The easy way to think about it is that every time you buy, sell, or receive a token you are either opening or closing a taxable transaction.
Not All Transactions Are Capital Gains
Crypto transactions come under different tax brackets depending on their nature. We have explained some of these differences in other guides, but here’s how the most common types of crypto transactions are handled:
- ‘Regular’ trade – capital gains tax
- Airdrop – income tax
- Staking – income tax
- Leverage trading – unclear, both capital gains and income tax may apply
- Yield farming – income tax
- Paid for work in crypto – income tax
If you are in doubt about whether your activity is considered income tax or capital gains tax, consider whether the activity resulted in you earning more coins than you started with. If you gained coins as part of the action then it is likely income tax, whereas if the profit resulted from an increased fiat value of your holding then your trade represents a capital gain.
Beware Pooling
Pooling is something that HMRC introduced in 2018 and is needed if you have co-mingled the same coin (bought more without first liquidating the entire holding). Pooling involves some very complex calculations and gets more complex the more trades you bring into it, so you’d better have your math head on if you intend to do it yourself.
Keep Records
HMRC knows that exchanges don’t hold records for long, and may even go under, so they rely on you to keep accurate records of every single transaction you make. They have been very specific about what records you need to keep, which you should record like this:
If you have a large number of transactions then you should consider creating a spreadsheet with different tabs for each coin.
Software Can Help
There are several software tax solutions that calculate your taxes through uploaded spreadsheets or even track your trades through an API and automatically calculate your taxes for you. Naturally this makes life much, much easier, but remember that not all software was created equal, so it’s worth seeking reviews and asking for a free trial before committing to one. You should also make sure that their software adheres to the latest HMRC guidance.
Hire an Accountant
Hiring an accountant is not something everyone can afford, but if you have made a fat stack in your crypto exploits in the past year it is well worth handing your records over to a professional to work out your crypto tax. Not only are you guaranteed to get the job done right, you know they will be all over the latest regulations and will do all they can to reduce your tax bill.
Crypto Tax is a Minefield You Don’t Want to Be In
Crypto tax is such a complicated thing, with potentially huge ramifications if you get things wrong, that if you think you have earned over the capital gains threshold of £12,300 it is well worth enlisting professional help. Remember that your accountant will need clear records to work with, so make sure you keep these regardless.
If you do choose to file your own records, look into crypto tax software as a minimum, and make sure you file by the deadline – January 31, 2022.
