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Cryptocurrencies like Bitcoin have been riding a wild rollercoaster of highs and lows lately. After surging following Donald Trump’s election and experiencing sharp drops, the market saw another boost when the US president shared details about a proposed crypto reserve. But while these dramatic price swings might grab attention, there’s another important factor that investors should not overlook: taxes.
Whether you’ve made money by earning crypto through work, mining, or buying it, understanding the tax implications is crucial. In fact, failing to account for taxes could eat into your profits—perhaps even more than the volatility of the market itself.
Income vs. Capital Gains Tax: What’s the Difference?
If you earned your cryptocurrency, either through employment or mining, you may be on the hook for income tax. However, if you bought crypto and then sold it for a profit, capital gains tax (CGT) will apply. Here’s how it works:
- Calculate Your Gain:
When selling crypto, you need to determine the difference between what you paid and what you sold it for. If you’ve purchased multiple coins of the same type, you can pool the cost of these coins and then calculate an average cost per coin. - Account for Transaction Fees:
Crypto exchanges often charge hefty transaction fees when you buy or sell. Fortunately, these fees can typically be deducted from your taxable gain, so make sure to keep track of them. - Offset Losses:
If some of your crypto investments have lost value, you can offset these losses against any gains, potentially reducing your overall tax liability. However, you’ll need to report these losses to HMRC (Her Majesty’s Revenue and Customs) to benefit from this deduction.
Keeping Track of Crypto Records: Why It Matters
The key to staying on top of your taxes is to keep accurate records. This includes:
- Dates of disposal (when you sold or exchanged your crypto)
- Pooled costs (the total cost of the crypto you’re selling)
- Transaction details (including fees, wallet addresses, and exchanges used)
- Remaining balance (the amount of crypto you still hold)
Remember, while your crypto wallet might store some of this information, it won’t necessarily keep a permanent record, especially if the exchange shuts down. Therefore, it’s essential to hold onto bank statements and transaction records as proof.
How HMRC is Keeping an Eye on Crypto
You might think your crypto activities are private, but that’s no longer the case. Starting in 2026, global crypto transactions will be automatically reported to HMRC. The first reports are expected by the end of May 2027.
HMRC already collaborates with major exchanges, giving them access to your transaction data. So, even if you don’t voluntarily report your crypto gains, they can still track your activity—and that can lead to penalties for failing to pay the taxes owed.
Don’t Let Tax Penalties Catch You Off Guard
Failing to disclose your crypto profits can result in hefty fines, depending on how aggressively you try to hide your gains. In the worst-case scenario, you could face significant financial penalties.
So, if you’ve been riding the crypto wave for excitement, it’s time to add some serious paperwork to your routine. The more organized you are with your records, the better prepared you’ll be when it’s time to file your taxes.
