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I am trying to work out capital gains for cryptocurrency transactions. All of the advice I have seen says that I have to calculate everything based on individual transactions, using the market value at the time of the trade. There are various rules to follow depending on the time between the trades.

It becomes insanely difficult to work out if you've done a lot of trades and especially if the trades don't involve GBP, since you have to lookup and calculate an equivalent GBP value for every single transaction.

Is this for my benefit or the benefit of HMRC? I don't really see how it benefits anyone to be honest - reporting more of a loss now just means I'll have more of a gain later so what's the point?

Why can't I just do a simple calculation based on the initial purchase cost and the market value at the end of the tax year? Or have I missed something and this is actually allowed?

In case it's relevant I'm expecting to be reporting a loss overall.

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    This is why boring record keeping is sooo important. (Traditional stock brokers normally do this for you, and keep track of your short and long term capital gains.)
    – RonJohn
    Commented Jan 15, 2023 at 11:21
  • The U.S. has a "trader status" for unregulated investors that make a lot of trades. Actually, the election is for mark-to-market accounting. Whether or not trader-status is accepted basically depends on whether or not the tax deductions, or other losses, are accepted. But there's no wash-sales in U.S. crypto so mark-to-market accounting is probably not popular for crypto. However, mark-to-market allows large trading losses to be taken without carryover. Just have something to set the losses against. kbhscape.com/kbh.htm .
    – S Spring
    Commented Jan 16, 2023 at 12:47

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On the currency issue: I believe HMRC allow you to use an average exchange rate over the year. They publish what they consider the average rate to have been in documents like these: https://www.gov.uk/government/publications/exchange-rates-for-customs-and-vat-yearly (it says "for customs and VAT" but on the HMRC forums I've seen them refer people to it for capital gains purposes). The document with the annual average rates to March 2022 would be appropriate to use for a 2021-2022 tax-year self assessment. (There's also monthly averages somewhere if you want something a little more fine-grained). I have also heard anecdotally that they take a dim view of people/companies attempting to game the system by flipping whether they use annual averages or spot rates from year to year depending which one works out better for them... you're expected to stick with one or the other.

On this: "Why can't I just do a simple calculation based on the initial purchase cost and the market value at the end of the tax year?"... this makes me think you don't understand how capital gains tax works and what's actually taxed. The market value of things doesn't matter: I could have something worth £10,000 at the start of the year and £100,000 at the end of the year and there'd be no tax to pay at all. It's only selling that produces a "CGT event" which actually crystallizes a gain (or a loss) relative to the price paid.

Playing wheeler-dealer trading games outside of ISA & SIPP "tax shelters" (within which you don't have to deal with any of this stuff) comes with an obligation on investors to understand the tax implications of what they're doing, in addition to all the "DYOR" and due dilligence they're supposed to do on whatever they're investing in.

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    I'm aware this is how CGT works, my question is why it's done this way and who benefits from doing it this way instead of just using market values (and whether you are allowed to use market value if you want to keep things simpler).
    – SystemParadox
    Commented Jan 27, 2023 at 1:14
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    @SystemParadox: the problem is, lots of assets (possibly the vast majority) which are subject to CGT do not have a known "market value" until they are actually sold and we find out what someone actually thinks they're worth. Property, land, unlisted privately-held businesses, artworks, jewellery... a lot of times "market value" would just be pure guesswork. Proposals for "wealth taxes" run into similar issues... in 2020 the UK's "wealth tax commission" ukwealth.tax concluded the need to value lots of illiquid things would turn us into "a nation of valuers".
    – timday
    Commented Jan 29, 2023 at 13:23
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    @SystemParadox:I suppose if you wanted to "keep things simpler" by "paying as you go"... a solution would be to sell out of everything at the end of every tax year, and buy back in at the start of the next tax year. That'd crystallize each years' gains and losses, and start each new year with a "clean slate". The problem with that is, the 30 day share matching rules mean you'd have to be out of the market for 30 days, at least if you wanted to go back into the same assets.
    – timday
    Commented Jan 29, 2023 at 13:28
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This is not UK based, but in general, you absolutely do not want to be forced to pay taxes on the hypothetical gain at the end of the tax year.

Assume you bought 100 bitcoins at 0,10€. If they raise to 10k€ at the end of your tax year, and you would have to report it as taxable gains, you will have to pay taxes on 1 million €.

Unless you have that money available, you probably would have to sell some of your bitcoins at 10k€ just to pay for the taxes. And then you would own less bitcoins when they are at 60k€ when you actually wanted to sell.

Or imagine if you are Elon Musk and have to pay taxes on some hundred billion dollars that his tesla shares are worth on paper.

Or imagine if you own a house in London, and the tax office wants you to pay taxes just because you could sell it now for a large profit. Do you sell to pay those taxes (with the added benefit that the tax office can also collect stamp duty from the buyer)? Do you get a mortage, maybe in addition to your current one that you can barely afford?

Every tax office would love to tax you or Mr. Musk on those gains, since they would get the money earlier. And if you start with a loss, you usually don't get money back, so the tax office would always be ahead. (Although I am not sure if UK allows you to substract your bitcoin losses from your other income, which could be considered a money back for many employees.)

So yes, it is usually to your benefit that they don't do that.

Vice versa, if you have a loss, it would be to your benefit if you could get the money earlier. In fact, you could come up with a neat trick and sell your bitcoins that you bought at 60k€ for 20k€, to compensate some other gains and pay less taxes. And to not miss out on potential gains, you just buy the bitcoins back at once. Most tax offices don't like that trick, and UK also seems to have a 30 day wash sale rule for that reason.

As I said, I am not familiar with UK rules, but I doubt they do it differently than the rest of the world. And if you would be allowed to choose, you would always pick what's best for you (e.g. you would not pay taxes on hypothetical gains, but declare losses on hypthetical losses), so it is unlikely that such an option exists.

Nevertheless, there might be UK specific exemption limits where, if you are below those, don't have to pay taxes and maybe also don't have keep track of your gains at all (until you are above and have to backtrack everything).

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  • I don't understand why this answer has been downvoted without explanation, I found it useful.
    – SystemParadox
    Commented Jan 22, 2023 at 0:57

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