HMRC warning as millions in UK may face ‘penalties’ | Personal Finance | Finance
Millions of Brits dabbling in bitcoin and other digital currencies have been warned they could face penalties if they fail to declare gains to the tax authority.
HMRC issued a fresh alert on social media as crypto markets continued a rollercoaster ride of wild rises and falls, reminding investors that profits can trigger a tax bill.
In a post on X, HMRC warned: “Any gains count towards your Capital Gains tax-free allowance of £3,000 a year.”
When tax is due
Under the rules, investors may need to pay Capital Gains Tax (CGT) if they make a gain 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)
Investors must calculate their total gains across the tax year (April 6 to April 5). If total gains exceed the £3,000 CGT annual exempt amount, they must report the gain to HMRC and pay tax.
The £3,000 allowance applies to the current tax year. Gains above that threshold are taxed at CGT rates, depending on the individual’s overall income and the type of asset.
HMRC also makes clear that other taxes may apply in certain circumstances – for example, Income Tax may be due if cryptoassets are received as employment income.
How gains are worked out
In most cases, the gain is the difference between what you paid for the tokens and what you sold them for. However, special rules apply in some cases, including transfers between ‘connected persons’.
Investors can deduct allowable costs, including:
- transaction fees
- advertising costs for a buyer or seller
- drawing up contracts
- valuation costs
- a proportion of the pooled cost of tokens
However, some costs cannot be deducted, such as mining expenses like equipment or electricity. A key feature of the regime is ‘pooling’. Investors must group each type of token into a pool and calculate an average cost.
How this works
If an investor buys 100 tokens at £2 each (£200 total) and later 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 deducted from the sale proceeds to calculate the gain.
However, tokens bought on the same day as a sale – or within 30 days – are not pooled and instead follow share matching rules set out in HMRC’s Helpsheet HS284.
Record-keeping is essential
HMRC warns investors must keep detailed 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
While some crypto exchanges provide transaction reports, HMRC stresses these “are not tax calculations” and “will not keep track of your pooled costs”.
How to report
If tax is due, investors can report and pay either by:
- completing a Self Assessment tax return
- using the Capital Gains Tax real-time service
For the 2024–25 tax year onwards, there is a specific 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.
