How Does Capital Gains Tax Work on Cryptocurrency?

Introduction

Cryptocurrency has become a mainstream investment, but many people are unaware that it is subject to tax in the UK. HMRC treats crypto assets such as Bitcoin, Ethereum, and other tokens as property, not currency. This means that when you sell, exchange, or give away crypto, you may owe Capital Gains Tax (CGT) on any profit made.

Understanding how CGT applies to cryptocurrency helps you avoid unexpected tax bills and ensures that you stay compliant with HMRC rules. This article explains when you have to pay CGT, how to calculate your gain, what records you need to keep, and how to report your crypto profits correctly.

When You Pay Capital Gains Tax on Crypto

You must pay CGT when you dispose of cryptocurrency, meaning when you:

• Sell crypto for pounds sterling or another currency.

• Exchange one type of cryptocurrency for another.

• Spend crypto to buy goods or services.

• Give crypto away to someone other than your spouse or civil partner.

Each of these transactions is treated as a disposal. You pay CGT on the gain — that is, the difference between what you paid for the crypto (the “cost basis”) and what it was worth when you disposed of it.

You do not pay CGT simply for holding cryptocurrency, even if its value increases. The tax is only triggered when you sell, swap, or spend it.

The Annual CGT Allowance

Every UK taxpayer has a Capital Gains Tax allowance, also known as the annual exempt amount. For the 2024 25 tax year, the allowance is £3,000 per person.

This means you can make up to £3,000 in gains across all assets, including crypto, before you owe any tax. If your total gains are below this threshold, you do not have to pay CGT, although you should still keep records.

Capital Gains Tax Rates

The rate of CGT you pay on crypto depends on your income tax band.

• Basic-rate taxpayers: 10% on most assets, including crypto.

• Higher- and additional-rate taxpayers: 20% on most assets, including crypto.

If your total taxable income and gains push you into a higher tax bracket, the part of your gain that exceeds the basic-rate threshold will be taxed at 20%.

Calculating Your Capital Gain

To calculate your gain, subtract the original cost of acquiring the crypto (including any transaction fees) from the value when you sold, exchanged, or spent it.

Example:

• You bought 1 Bitcoin for £10,000.

• You later sell it for £18,000.

• Your gain is £8,000.
  After deducting your £3,000 allowance, you will pay CGT on £5,000.

If you are a higher-rate taxpayer, your tax bill would be £1,000 (20% of £5,000).

Pooling and the Share Matching Rules

If you buy and sell cryptocurrency at different times, HMRC uses a method called pooling to calculate gains. This means you group all coins or tokens of the same type into a single pool and calculate an average cost per unit.

When you sell some of your crypto, HMRC applies the following rules in order:

1. The crypto bought on the same day as the disposal.

2. The crypto bought within the next 30 days.

3. The remaining crypto in your pool (based on average cost).

This approach ensures you cannot sell crypto and immediately repurchase it just to create an artificial loss for tax purposes.

When You Can Offset Losses

If you sell cryptocurrency for less than you paid for it, you can claim a capital loss. This can reduce your overall CGT bill by offsetting it against your gains from other assets.

To use a loss, you must report it to HMRC, either through your Self Assessment tax return or via a real-time CGT report. You can carry unused losses forward to offset gains in future tax years.

Example:
If you made £6,000 in crypto gains and £2,000 in crypto losses, your taxable gain would be £4,000 before applying your £3,000 annual allowance.

Gifting Cryptocurrency

Gifting cryptocurrency to someone other than your spouse or civil partner is considered a disposal for CGT purposes. You must use the market value of the crypto at the date of the gift to calculate your gain or loss.

However, gifts between spouses or civil partners are exempt from CGT. The recipient simply inherits your original cost basis, and no tax is due until they later dispose of the asset.

Spending Crypto on Goods and Services

HMRC also treats spending cryptocurrency as a disposal. For example, if you use Bitcoin to buy a car, the transaction is considered a sale of Bitcoin at its market value.

If your Bitcoin has risen in value since you bought it, you may owe CGT on the gain — even though no cash changed hands.

Record Keeping Requirements

HMRC requires detailed records for every crypto transaction. You should record:

• The date you bought and sold or exchanged crypto.

• The amount and type of cryptocurrency.

• The value in pounds sterling at the time of each transaction.

• Transaction fees and other costs.

• Wallet addresses and transaction IDs.

Accurate records are essential for calculating your gains and losses correctly. HMRC can request these details if they audit your tax return.

Reporting and Paying CGT on Crypto

You can report and pay Capital Gains Tax in two ways:

1. Self Assessment tax return: Most people declare crypto gains when filing their annual tax return by 31 January after the end of the tax year.

2. Real-time CGT service: You can report crypto disposals to HMRC as they occur using the online CGT service.

If you owe tax, payment is due by the same 31 January deadline. Late payment may result in interest and penalties.

Example Scenario

Lucy buys £5,000 worth of Ethereum in 2022 and sells it two years later for £14,000. Her gain is £9,000. After subtracting her £3,000 CGT allowance, she pays tax on £6,000.

As a higher-rate taxpayer, her CGT bill is £1,200 (20% of £6,000).

If she had also made a £2,000 loss on another crypto trade, she could offset this loss, reducing her taxable gain to £4,000 and lowering her tax bill to £800.

How HMRC Tracks Crypto Transactions

HMRC actively monitors cryptocurrency activity through information-sharing agreements with major exchanges. Many exchanges, such as Coinbase, provide user data directly to HMRC.

This means that even if you think your transactions are private, HMRC can still trace your trading history. It is always better to declare your crypto activity accurately rather than risk penalties for underreporting.

The Role of an Accountant

A crypto tax accountant can help you:

• Calculate accurate gains and losses.

• Determine which transactions are taxable.

• Use allowances and losses to reduce your bill.

• Prepare and submit your tax return correctly.

• Stay compliant with evolving HMRC rules.

Professional advice is particularly helpful if you trade frequently, use multiple exchanges, or have complex transactions such as staking or DeFi activity.

Conclusion

Capital Gains Tax applies to cryptocurrency whenever you sell, exchange, or spend your digital assets at a profit. You are taxed on the gain, not the total value, and the rate depends on your income bracket.

To stay compliant, keep detailed records, track your gains and losses, and report them to HMRC on time. If your crypto activity is complex, working with an accountant can help you calculate your liability accurately and make the most of available allowances.