HMRC Issues Fresh Warning on Crypto Tax Penalties for Millions of Brits

HMRC Issues Fresh Warning on Crypto Tax Penalties for Millions of Brits

Millions of Brits investing in bitcoin and other cryptocurrencies have been cautioned by HMRC that they could face penalties if they fail to declare profits to the tax authority. This alert comes as crypto markets experience ongoing volatility with dramatic surges and plunges, reminding traders that earnings can result in a tax liability.

Tax Liabilities and Capital Gains Rules

In a post on social media platform X, HMRC emphasised that any gains from cryptoassets count towards the Capital Gains Tax-free allowance of £3,000 per year. According to regulations, traders may be liable for Capital Gains Tax if they make a profit when they 'dispose' of cryptoasset tokens such as bitcoin, XRP, or ether.

Disposals include:

• Selling cryptocurrency.
• 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 calculate their total profits across the tax year, which runs from April 6 to April 5. If overall profits exceed the £3,000 CGT annual exempt threshold, they are required to notify HMRC and pay tax. The £3,000 allowance applies to the current tax year, with profits beyond that limit taxed at CGT rates based on the individual's overall income and asset type.

Calculating Profits and Allowable Expenses

In most cases, profit is determined by the difference between the purchase price and sale price of tokens. However, special regulations apply in certain scenarios, such as transfers between 'connected persons'. Investors can subtract allowable expenses, including:

• Transaction fees.
• Advertising costs for finding a buyer or seller.
• Costs for drawing up contracts.
• Valuation expenses.
• A proportion of the pooled cost of tokens.

Certain expenses, such as mining costs like equipment or electricity, cannot be deducted. A key aspect of the system is 'pooling', where investors must group each type of token into a pool and calculate an average cost.

How Pooling Works in Practice

For example, if an investor purchases 100 tokens at £2 each (totalling £200) and later buys 300 more at £1 each (totalling £300), they own 400 tokens with a total cost of £500, resulting in an average cost of £1.25 per token. If they sell 200 tokens, the cost used for tax calculation would be £250 (200 × £1.25), which is subtracted from the sale proceeds to determine the profit.

Tokens purchased on the same day as a sale or within 30 days are not pooled and instead follow share matching regulations as outlined in HMRC's Helpsheet HS284.

Record-Keeping and Reporting Requirements

HMRC warns that investors must maintain comprehensive records for each pool of tokens, including:

• The type of tokens.
• Dates of disposal.
• Number of tokens sold and remaining.
• Value in pounds sterling.
• Bank statements.
• Pooled costs before and after disposal.

While some crypto exchanges offer transaction reports, HMRC stresses that these are not tax calculations and will not track pooled costs. If tax is owed, investors can report and pay by completing a Self Assessment tax return or 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 whether tax is due when selling cryptoassets is available, and those needing to disclose unpaid tax for earlier years can use HMRC’s Cryptoasset Disclosure Service.