Crypto Loss Tax Guide: Everything You Need To Know

Introduction

With HMRC keeping a close eye on the evolving landscape of digital assets, it’s more crucial than ever to understand how to report your cryptocurrency activities accurately.

Whether you’re a seasoned investor or just starting in the world of Bitcoin, Ethereum, and other digital currencies, staying compliant with UK tax laws is paramount to avoiding potential pitfalls and penalties.

This blog aims to demystify the process of reporting your cryptocurrency transactions to HMRC.

How to Report Crypto to HMRC

When reporting your crypto transactions to HMRC, the devil is in the details. Every transaction you make with cryptocurrencies could have tax implications.

Identifying Taxable Transactions

Before filling out forms, you need to identify which transactions are taxable. Here’s a breakdown:

Selling crypto for fiat currency: Anytime you convert your crypto into pounds sterling, euros, dollars, or any other traditional currency, it’s a taxable event. You need to calculate the gain or loss from the transaction.
Exchanging one crypto for another: It might feel like a simple trade, but this counts as disposing of one asset and acquiring another for tax purposes. Each trade has potential gains that need to be reported.
Spending crypto on goods and services: Using crypto to buy a coffee, a computer, or pay for a service? That’s a taxable event. The value of the crypto at the time of the transaction dictates your capital gain or loss.
Gifting crypto: Gifting is nuanced. While there’s an annual exempt amount for gifts, any amount above this can be taxable. However, gifting to your spouse or civil partner is usually exempt.

Reporting Accurately to HMRC

Accuracy is your best friend when reporting to HMRC. Follow these steps to ensure you report your crypto transactions correctly:

Keep meticulous records: For every transaction, record the date, the type of crypto, the quantity traded, the value in GBP at the time of the transaction, transaction fees, and the cumulative total of your investment. This information will be invaluable when calculating your taxes.
Calculate your gains and losses: For each taxable event, calculate your gain or loss. This involves subtracting the cost basis (how much you initially paid for the crypto, including fees) from the sale price or value of the transaction.
Understand disposals: HMRC views each transaction as a “disposal,” which triggers a potential CGT event. Ensure you understand the disposal process and how it affects your tax obligations.
Use HMRC’s CGT report and SA100 forms: For most, reporting crypto gains falls under the capital gains section of the Self Assessment tax return (SA100). If your total gains exceed the annual exempt amount or if you have sold assets worth more than four times the annual exempt amount, you must report these gains to HMRC, even if your final tax due is below the threshold.
Submit your report on time: Timing is critical. The UK tax year runs from April 6th to April 5th the following year, and you have until January 31st to submit your tax return for the previous tax year. Late submissions can lead to penalties.

You can navigate HMRC requirements confidently by approaching your crypto tax reporting with diligence and attention to detail. Remember, when in doubt, consulting with a tax professional familiar with cryptocurrency can provide personalised advice and peace of mind.

Calculate your crypto taxes

Here’s how you can break it down:

Step 1: Determine the Type of Tax

First, understand whether your crypto activity falls under Capital Gains Tax (CGT) or Income Tax:

Capital Gains Tax: This applies if you’re selling crypto, swapping it for another crypto, spending it on goods or services, or gifting it (except to your spouse or civil partner). If you’re disposing of crypto assets, CGT is likely in play.
Income Tax Comes into the picture if you’re mining, staking, or receiving crypto as payment for work. Therefore, these activities are considered to earn income and are taxed differently from capital gains.

Step 2: Record Every Transaction

For each crypto transaction, you need to keep detailed records. This includes:

The date of the transaction
The type of cryptocurrency involved
The quantity of crypto bought or sold
The value of the transaction in GBP at the time of the transaction
Any associated costs like transaction fees
The cumulative total of your investment (for capital gains calculations)

Step 3: Calculate Gains and Losses

To calculate your gains or losses, you need to know the cost basis of your crypto (how much it initially costs, including fees) and compare this to how much you sold it for (or its value when you disposed of it).

Gain or Loss = Sale Value − Cost Basis

Capital Gains Calculation: Subtract the cost basis from the sale value. If the result is positive, you have a gain. If it’s negative, you have a loss.

Step 4: Apply Allowances and Deductions

CGT has an annual exempt amount (£6,000 for the 2023/24 tax year). You only pay tax on gains exceeding this amount.

Pooling: If you’ve bought and sold the same type of crypto multiple times, you’ll use the pooling method to calculate your cost basis, which averages the cost of all acquisitions.

Step 5: Account for Losses

If you incur losses, they can be deducted from your gains to reduce your taxable income. However, you must report these losses to HMRC to apply them in the current or future tax years.

Step 6: Report and Pay

Once you’ve calculated your total gains (and applied any exemptions or losses), report this to HMRC via the Self-Assessment tax return. Pay any tax owed by the deadline (January 31st following the end of the tax year).

Why Register Early?

Registering for HMRC’s online services well in advance is critical. This early registration ensures you’re not scrambling as the deadline approaches, providing peace of mind and ample time to address any questions or concerns you might have about your tax return.

The Registration Process:

Visit HMRC’s Website: Start by navigating to the official HMRC website and look for the section on self-assessment tax returns.
Sign Up for an Account: If you haven’t already, you must create an account. This involves providing personal details to verify your identity
Enroll for Self Assessment: Once your account is set up, you must enroll for Self Assessment. This step is crucial for anyone filing a tax return for the first time.
Wait for Your UTR: HMRC will send you a Unique Taxpayer Reference (UTR) number by post after enrolling. You’ll need this UTR to complete your registration and file your tax return.
Activate Your Account: You can activate your Self-assessment account online with your UTR. HMRC will send an activation code by post, which you’ll use to finalise your registration.

Report Income in SA100

The SA100 Self Assessment tax return is a comprehensive document designed to capture all your taxable income over the financial year, including income from employment, self-employment, property, and capital gains from crypto transactions.

Filling Out Relevant Sections

Capital Gains: Complete the Capital Gains section detailing the sale of crypto assets. This includes the dates of transactions, the amounts in GBP, gains or losses, and any applicable deductions.
Supplementary Pages: You may need to fill out additional sections depending on your activities. For instance, if you’ve received income from mining or crypto staking, this might be reported as self-employment or miscellaneous income.
Key Deadlines: When preparing your tax return, being aware of the critical deadlines is crucial. The final date for submitting your online tax return and any tax owed for the previous tax year is 31st January. Missing this deadline can result in immediate penalties from HMRC, starting with a £100 fine that can increase over time, alongside interest charges on late payments.
Determining Your Tax Rate: The rate of CGT you’ll pay on crypto gains depends on your total taxable income. Basic rate taxpayers pay 10% (or 18% on residential property), while higher or additional rate taxpayers pay 20% (or 28% on residential property). Remember, crypto assets are subject to the same rates as other capital gains, not the higher property rates.
How to Report and Pay: Finalising Your Tax Obligations: Complete the relevant sections of the SA100 form after calculating your taxable gains. Reporting your taxes accurately is crucial to avoid penalties or audits from HMRC.
Reporting and Payment Process: Use HMRC’s online portal to submit your Self Assessment tax return. Pay any due tax through the portal. Payment methods include bank transfer, debit card, or even setting up a payment plan if you cannot pay in one lump sum. Ensure you double-check all figures and calculations before submission to avoid errors.
Records You Must Keep: HMRC may ask about the details of your transactions, so keeping comprehensive records is non-negotiable. This includes documenting every cryptocurrency buy, sell, trade, or exchange.

Required Records:

Dates of transactions: When you bought, sold, or exchanged crypto.
Transaction values: How much you spent or received converted to GBP at the time of each transaction.
Asset type: The specific cryptocurrencies involved in each transaction.
Cumulative investment: Keep track of the total amount spent acquiring crypto assets.
Records of the pool: If you’re using the pooling method, maintain detailed records of the pool’s cost basis and adjustments over time.
Retention Period: You must keep these records for at least 5 years after the 31 January submission deadline of the relevant tax year. For example, for the tax year ending on 5th April 2021, you must keep your records until at least the end of January 2027.

FAQs on Reporting Cryptocurrency to HMRC

How do I start reporting my cryptocurrency transactions to HMRC?

Begin by identifying all taxable transactions, including selling crypto for fiat, exchanging cryptos, using crypto for purchases, and gifting. Keep detailed records of each transaction, calculate your gains or losses, and report these on your Self Assessment tax return using the SA100 form.

What types of crypto transactions are taxable?

Taxable transactions include selling cryptocurrency for fiat money, exchanging one cryptocurrency for another, spending cryptocurrency on goods or services, and gifting cryptocurrency (with exceptions for spouses and civil partners).

How can I calculate my gains or losses on crypto transactions?

Calculate your gains or losses by subtracting the cost basis (the amount you initially paid for the crypto, including fees) from the sale price or value of the crypto at the time of the transaction.

What are allowable costs, and how do they affect my tax calculation?

Allowable expenses include purchase costs, transaction fees, and professional fees directly related to the buying or selling of crypto. These costs can be deducted from your gains, reducing your taxable income.

How do I report and pay my cryptocurrency taxes?

After calculating your taxable gains, report them on the SA100 Self-Assessment tax return form and submit it to HMRC. Pay any tax owed through HMRC’s online portal, ensuring all figures are accurate to avoid issues.

Master Your Crypto Taxes with Confidence

If you need help with your crypto tax obligations, Crypto Tax Degens is here to help. Our community is packed with resources, and our experts, including crypto tax guru Andy Wood, are always ready to guide you through the complexities of crypto taxation.

Join our community today to gain exclusive access to expert advice, up-to-date information, and the support you need to understand the crypto tax landscape confidently. Whether you’re a seasoned investor or new to the crypto world, we’re here to ensure your journey is as smooth and profitable as possible.