If you have made crypto gains and have no idea where to start when declaring those to HMRC, you are definitely not alone. Many investors are required to file a tax return for the first time and given that the guidance is currently quite difficult to interpret it is becoming a heavy burden for UK crypto investors.
In our article below we will detail the most effective way to ensure you are as compliant as possible and prepared as possible for any HMRC review into your tax position.
1. Research what taxable events are and how they are taxed in the UK.
Investing in cryptocurrency is far from risk free and extremely volatile. That is why it is essential to ensure you have a basic understanding of taxable events and how they may affect your trading strategy.
Many investors and traders ignore this crucial part and may find themselves in a position with a high realised tax bill and a significant decline in the value of their portfolio. This could leave them without enough money to cover an impending tax bill. Preparation is therefore not only key but essential.
Key points to note here are:
1. Any trade, crypto to crypto, crypto to stable coin or crypto to fiat WILL create a taxable event and is taxed under Capital Gains Tax rules in the UK.
2. Staking and mining rewards are taxed under miscellaneous income at your current tax rate.
3. If the staking reward tokens are held and increase in a value a CGT liability may be created.
4. DeFi lending protocols are taxed under income tax where ‘interest’ is paid in the form of rewards or tokens.
2. Prepare all your wallets and exchange details on one document.
When it comes to prepping your data to be imported into a tax tracking software, such as ACCOINTING.com, it is really important you have all your wallets and exchange details on hand. Keeping a log of your transactions, wallets or exchanges etc. is a great way to keep an overview of all your financial and tax information. If you do not import all your transactions and keep a well documented log, you will have a lot more reconcilliatory work to do later.
The second reason for keeping a log is that you can use the information recorded as a supporting document when you file your crypto tax returns. We all know how hard it can be to remember those random coins you purchased on that random exchange! A clean and organized record keeping of all of the exchanges you used will make it easy when it is time to generate your tax forms for UK tax season.
3. Import all your wallets and exchanges into ACCOINTING.com
This step is where detailing all those wallets or exchanges above becomes very handy! You will be able to work through your document and add in each wallet and exchange in a organised manner. This will ensure you are not missing transactions, and will save you time piecing together each and every single transaction.
We have seen many clients without a detailed list of their transactions and exchanges and it has been extremely difficult for them to identify transactions and transfers correctly. This in turn could lead to a higher than needed tax bill.
4. Work through the review process
The next step is to work through all the missing transactions, unrecognised currencies and internal transfers. This is the most important step as this is where you will tidy up all the errors that the system has.
Working though the review steps you will first look at the unrecognised currencies. These are currencies not recognised on Coin Market Cap (CMC) which is the system that ACCOINTING.com will use to pull in the prices of each token.
If you operate within the DeFi space, then you will likely have lots of these gaps particularly for liquidity farming or liquidity protocols. Tokens such as ALINK (Link when supplied to an AAVE pool) will not be required during the tax return process so these can be ignored. Recognising the currencies which can be ignored and those which can’t is very important to your overall tax bill.
Next is internal transfers. This is usually a fairly simple step of matching transfers between your own wallets. Be careful to spot any slight differences in value which will usually be down to differing fees.
Missing transactions is the most difficult step, especially if you haven’t added in all of your wallets or exchanges in step 2. This section focusses on deposits and withdrawals which cannot be matched with the opposite side of the transaction. An example would be, withdrawing 3 BTC from your Binance wallet which the system cannot find where this was deposited. You will need to work through these and classify the transactions accordingly (payment, gift or airdrop for example). You may also need to add in any wallets missed in step 2 which may clear some of these transactions.
Finally you will be working through any discrepancies within your exchanges and wallets between what the exchange shows as a balance to what the system (ACCOINTING.com) shows. This will require some further investigation to ensure these balances match, sometimes the missing amounts can be due to lending and staking. It is worth reviewing those as well as many exchanges do not account for lending or staking discrepancies.
5. Download tax report and review, then file with HMRC on self assessment.
The final step is to download the report and review the transactions on the report to ensure you are happy with the output.
The first page will summaries your taxable events such as capital gains tax, margin gains and income tax. Be sure to check these sections to ensure you are comfortable with what they show. If you are not then the next steps would be to go through those sections individually to check the transactions.
If you are happy then you need to include these figures on your tax return.
Finally we would suggest it is best practice to keep a detailed pack of information to present to HMRC on the off chance your accounts are reviewed. This would include:
This would include:
1. HMRC tax return.
2. Accointing tax report.
3. Document created in step 1 detailing all your wallets or exchanges.
4. Notes on any adjustments or write offs you have made.