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Let’s take a look at crypto to crypto trading and ask Recap to outline the tax implications of this common activity. Chances are if you’ve ever used crypto then you’ve made a swap and you’ll need to understand this basic concept.
What is a crypto to crypto trade (swap)?
Most crypto activity involves some kind of crypto to crypto trading. Let’s say you are new to the crypto world and you’ve purchased some Ethereum on an exchange. Now you’ve got your Ethereum there are thousands of other projects that you might want to get involved with. Some of these tokens allow you to do other things, some allow you to vote, some provide rewards and some are simply fun. Wherever the case, they will all involve a crypto to crypto trade or “swap” so it’s important to understand what’s actually happening from a tax perspective.
Understanding swaps
As crypto currencies are not regarded by HMRC as currencies, when you swap one for another you are actually making a taxable disposal of one asset and acquiring another. This is a commonly misunderstood area of crypto, something many users fail to realise and it’s easy to accidentally rack up large tax bills. Let’s look at a quick real-world example:
Sarah buys 5 ETH on a crypto exchange for £500. 2 weeks later, seeing the latest news on Twitter, she trades 0.5 ETH for 500 DOGE.
In this example we see Ethereum being traded for DOGE - a crypto to crypto trade or swap.
Tax treatment for swaps
HMRC has explicit guidance for crypto swaps here1. Each time a swap happens, the asset being traded is disposed of at “fair market value” and a new asset is acquired. Let’s take a quick look at our previous example and apply the tax treatment:
Day 1: Buy 5 ETH for £500, this means our cost basis is £100 per ETH
Two weeks later: Swap 0.5 ETH for 5,000 DOGE. 0.5 ETH was valued at £70 at the time of the swap.
To calculate the capital gains tax owed we can take the disposal minus the cost basis (£70 - £50) equals £20 capital gains.
The newly acquired DOGE has a cost basis of £70.
Other things to remember
When swapping one crypto for another there are often fees to pay. These are typically treated as separate disposals and need to be tracked alongside any swaps.
There are some more complex cases which we haven't covered here like if you are a trader rather than an investor or if you’ve swapped several assets for several other assets at the same time. We cover lots of edge cases like these in Recap’s comprehensive UK crypto tax guide.
Please remember - this article isn’t tax advice.
Author: David Collins is Head of Growth at crypto tax calculation service Recap.
Need some help with your crypto trades??
Keeping track of all your trades and associated fees can be complex and the tax accountability can be surprising - did you know that crypto airdrops are subject to taxation? Crypto tax software can automate everything for you by monitoring your wallets for trades and disposals. Tools like Recap keep track of all your transactions, automatically determine the fair market value of your assets and produce your tax return figures automatically. Get started for free at recap.io.
For any finance and accounting related queries, our Crunch advisors are always on hand to support.
References:
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