HMRC has released solid guidance on how cryptocurrencies are taxed in the UK. It’s all straight forward, mining/staking income is the same as any non-crypto source, and profits or losses made from crypto trading can be treated like those experienced by someone who traded shares of stock – capital gains taxes may apply though.

What is a capital gain and what’s this cost-basis I keep hearing about?

Capital gains are the difference between what you sell an asset for, and its cost-basis. This includes any associated costs like commissions or fees to buy it in the first place – so be sure these are considered when determining your capital gain!

If you are buying 10 Bitcoin and later selling the entire amount, then your cost-basis is easy to calculate. However, if we buy 10 BTC but only end up keeping 5 for ourselves in total transactions of 50/50, it becomes much more difficult because now there’s two different values being tabulated by whatever accounting program or software package you may be using.

An easy way of keeping track of your cost is to simply take the average cost of all your holdings and multiplying that by the sold amount. This is known as Average Cost Basis and is the foundation for calculating your capital gains in the UK and many other countries.

Record Keeping

Crypto taxes can be complicated; they’re not as straightforward as regular income tax. To start, you’ll need accurate records of all your transactions in Pound Sterling, so if you trade on international exchanges, it’s important to value those purchases using a consistent manner, such as by cross referencing rates from one exchange against another, or from different sources within Great Britain (depending what type of cryptocurrency is being used and when the purchase occurred during any given year).

How to calculate profit & loss on crypto trades with Share Pooling

The average cost basis is a fundamental accounting term. It refers to the price you pay for an equity security, regardless of when or where it was acquired. It can be easily manipulated by clever investors in order to dodge taxes on paper! To counter this HMRC lays out rules that define how these “average” prices should calculate themselves, which helps prevent tax dodging schemes like selling all your holdings at losses then rebuying them afterwards.

1. The same-day rule applies to the cost of selling an asset. This means that if you are buying and then selling back your own shares on one day, they will be matched with what was bought for them in the first place. There is no extra charge or interest owed in this situation because both transactions happen within two trading days after all other conditions had been met.

 2. The cost of assets bought during the 30 days following disposal typically ranges from 10-30%. This is known as FIFO or “first in, first out.” If you did not buy enough to cover all your disposed items, then move onto rule #3 for what’s left over.

 3. Take the average cost of all assets bought prior to the disposal.

Summary

You may now have a better idea of how capital gains are calculated in the UK according to HMRC’s share pooling rules. If you want to learn more, as well as ways for reducing your taxes with crypto currency, please feel free to get in contact with us here at AWOC Accounting.