The tax solution for UK cryptocurrency investors
An explanation of the origins of Recap and how we help UK individuals who invest in cryptocurrencies
Fri Sep 06 2019
Due to the UK’s approach to cryptocurrency taxation, calculating your taxable gain or loss on cryptocurrency investments can be a nightmare. Not anymore. Recap allows UK crypto investors to calculate their crypto tax position in minutes through our desktop application, which has automatic exchange integrations and end-to-end encryption, meaning your data remains yours.
Who needs to pay tax on crypto?
Bed and breakfasting. Incidental costs of acquisition. Section 104 holding. These are a few of the terms that are regularly mentioned when researching cryptocurrency taxation in the UK. To someone who isn’t well versed in accountancy terminology and HMRC’s methodologies, gaining an understanding of how cryptocurrency taxation works in the UK and calculating your own tax position requires a serious amount of time, effort and patience.
Investors who have realised gains over £12,000 (or if the total of all proceeds from disposals is over £48,000) from cryptocurrencies in the current tax year (thresholds are slightly lower for previous years, but taxes still apply) must file a tax return with HMRC and pay capital gains tax.
Additionally, cryptocurrency investors who have realised losses on their cryptocurrency investments have the opportunity to claim these losses with HMRC and use them to offset capital gains in the future. Calculating your capital gains tax position can be a nightmare due to the complexity of cryptocurrency tax rules and the calculation of costs and profits.
How does cryptocurrency taxation work in the UK?
Tax is often seen as a very mundane area of finance, however cryptocurrency taxation is quite interesting because of the challenges that policy makers are facing. Trying to tax a new and innovative asset class using old taxation systems is proving extremely difficult for tax authorities around the globe.
These difficulties have led to uncertainties for industry participants, for example clarification on the tax treatment of proceeds from staking cryptocurrencies. HMRC have issued no guidance on how the proceeds from cryptocurrency staking should be treated for tax purposes, despite many requests from chartered accountants and individuals.
Therefore, cryptocurrency investors have to guess HMRC’s own interpretation when filing their capital gains tax return and hope that HMRC’s thinking is the same as yours, or else you may get a fine and late payment penalty. Big yikes.
For that reason, we (Recap) worked with qualified tax professionals to produce this comprehensive UK crypto tax guide. It summarises all of HMRC’s guidance on cryptocurrency tax so far, with examples of calculation methods and areas which HMRC has not yet published guidance on (to be published if/when they finally do!). We hope you find it useful!
How do you calculate the profit or loss on a cryptcurrency
On top of the complexities surrounding cryptocurrency taxation rules, there is still the challenge of calculating your cryptocurrency tax position once you understand HMRC’s policies. This can be a daunting and extremely long process for cryptocurrency users with over a few dozen transactions.
Calculating the gain or loss from one cryptocurrency disposal requires the investor to consider:
- The nature of the taxable event
- The allowable costs for the cryptocurrency disposed of (do same-day or bed and breakfasting rules apply to this disposal? What is the average cost of your pool for this specific cryptocurrency, given the entire history of your dealings in that specific cryptocurrency, using accurate historic cryptocurrency pricing values and historic conversion rates between foreign currencies?)
- What are your disposal proceeds in GBP?
- What are your incidental costs of acquisition?
- What are your incidental costs of disposal?
After you have calculated all of these figures, you can determine the gain or loss you made from one disposal of a cryptocurrency for capital gains purposes. Now do that for all of your other cryptocurrency transactions!
Obviously, this is a ridiculous task to perform manually. One option is to pay an accountant who has a cryptocurrency focus to figure all of this out for you, however this could end up costing more than your actual tax liability.
How can Recap help?
Fortunately, Recap’s CEO Dan went through this process in 2017 when calculating his capital gains tax liability as a result of his cryptocurrency investments. It took 38 hours of his own time and 5 hours of his accountant’s time. Afterwards, he spoke to his friend Ben (Recap’s CTO), who was facing similar problems with his tax return and didn’t want to use existing solutions because he didn’t want to hand over all of his private financial data to a random company. They decided to create a product which would allow cryptocurrency investors to gain clarity on their tax position in minutes, whilst allowing them to have control over their private financial data.
Ben and Dan built Recap. Recap is a desktop application that allows you to create read-only API connections with your exchange accounts. The app then pulls all of your transaction history from the exchange via the API and displays it in the app. Once you have connected all the exchanges that you have used, you can generate a tax report for any tax year that shows the capital gain or loss for that year (along with more detailed data in case HMRC decides to investigate your tax return). Once set up, you can create a tax report at any time for any year and see your tax position, allowing you to make informed investment decisions.
All of this is done using end-to-end encryption, meaning no one at Recap, none of our services providers and no hackers can see your private financial data. We believe this is important in the cryptocurrency industry as information on who holds which cryptocurrencies and where is a honeypot for hackers or malicious employees/service providers. The best way to prevent this is through end-to-end encryption, as opposed to hoping that everyone involved with the company is trustworthy. We wrote an article that touches on this here.
Finally, Recap is focused solely on the UK market (US expansion soon™). Therefore, our tax engine has been designed to specifically satisfy HMRC’s requirements and has been reviewed and tested by several qualified UK crypto tax professionals. Our solution is the best crypto tax calculation software for UK investors.
If you would like to download Recap and give it a try (completely for free), click the button below. Follow us on twitter, @recap_io to keep up to date with everything Recap and UK crypto tax related!
Problems? Click Support on the left menu to talk to us from within the app or join our telegram group.