Does Paying Tax On Crypto Really Have To Be Difficult?

Crypto tax for investment funds can be a challenge but here are the pitfalls to watch out for & some tools that make it safer, faster, and easier to manage

Does Paying Tax On Crypto Really Have To Be Difficult?
Crypto tax for investment funds can be a challenge but here are some pitfalls to watch out for and some tools that make it safer, faster, and easier to manage.


Tax Avoidance? The Data Suggests Otherwise

Over the last two years we have seen a move towards acceptance of cryptocurrencies from governments and regulators across the world. This move is in part thanks to the increased adoption of crypto assets by institutional investors. Funds have benefited from the superior yields that DeFi has provided and now with April only several days away many are, or have, been preparing to pay tax on their crypto investments. The problem is that crypto taxes for a lot of investors can be very confusing. 

Rather than legislate tax rules specifically for the crypto industry, most regulators have opted to bend and shape existing legislation to apply to crypto in some way even if those rules don't make entire sense as we will see in this blog. 

Many non crypto natives have the impression that Bitcoin and other cryptocurrencies are being used as a tool to evade taxes but a survey by CoinLedger the 'State of Crypto Tax Reporting' found that the majority of investors pay tax on crypto earnings and only 15% attempted to avoid paying. The report did however identify that education around tax reporting was patchy and resulted in 20% of respondents saying they didn't know how to report crypto on their tax forms. 

As a DeFi investment fund, reporting can be even harder. So what does a fund need to watch out for in terms of pitfalls?


Regulators are tightening the rules

In the United Kingdom the HMRC introduced new rules for DeFi lending and staking that appear to be at odds with the approach made by the FCA and the government. These new rules particularly impact DeFi funds in terms of tracking and reporting gains and losses. 

According to these rules when a token is lent or staked on a protocol or platform it could be classified as a disposal and will require recording and including in the Corporation Tax report even though control of it still remains with the investment fund. For individual traders the burden is even higher with them theoretically having to complete a real-time Capital Gains Tax report whenever they deposit tokens with a protocol.

Ian Taylor, executive director of CryptoUK spoke out at the time saying:

'This treatment of crypto lending and staking creates an unnecessary burden for any crypto investor who will now be required to include details of any lent assets (in certain cases inaccurately determined to be 'disposed') on their tax returns and will have to carry out additional reporting which could require individuals to report hundreds or even thousands of transactions.'

So What Taxes Need To Be Paid?

Cryptocurrencies are considered property in the UK not money or a currency. The HMRC has developed a ‘Cryptoasset Manual’ that explains the rules and how existing tax laws apply to the crypto asset class. For individuals as opposed to businesses the guidance is that taxes are split between capital gains and income. For a business including investment funds, tax on crypto trading is subject to corporation tax on the profits.

A fund may of course report on losses but the HMRC will expect to see the badges of trade before allowing loss relief.  When performing trades on an exchange the HMRC sees crypto as fungible assets which means each type of cryptoasset should be pooled according to the HMRCs pooling rules. These rules are explained in detail by Sam Inkersole from

For tax of crypto assets that are simply being held in treasury the requirement is that the gains are reported in a Corporation Tax report after they have been disposed of. A disposal will occur whenever the business sells the crypto asset, exchanges it or uses it to pay for goods and services. 

Now there are a few quirky assets that are taxable you shouldn't overlook when reporting. They are airdrops and NFTs, and both of these have been popular with investors over the last year so they could land some investors in hot water with their taxes.

Airdrops are where you receive an allocation of crypto for holding a particular token or taking part in a marketing campaign or even a giveaway competition. Most of the time these airdrops are treated as an investment so disposal of them will be considered profits. The same is true if your fund earned the tokens in some way or received them as payment.

NFTs could end up being more complicated as there is no specific advice surrounding them just yet, but tax professionals are advising that NFTs are treated as virtual assets just like tokens. Purchasing, selling and gifting an NFT are all potentially taxable events.

Finally you need to be aware of VAT. The European Court of Justice decided that bitcoin and other cryptocurrencies should be treated like other currencies when it comes to VAT. This means that buying and selling crypto will not result in a VAT charge.


How many pages is that Tax report?

When you look through the available information from the HMRC you can see that actually the taxes aren't really that confusing but that doesn't of course solve the burdensome reporting requirements which have become even more problematic for DeFi funds. You will need to record the value of the tokens at the date of transaction in your countries fiat currency, when you bought them, when you sold or exchanged them and you need to do this every time you lend or stake your assets on a DeFi protocol.

tax on crypto is a lot of forms

Tools to make it safer, faster and easier

Tracking all of your transactions could be a nightmare especially for a fund that uses a high frequency trading strategy. Thankfully there are tools out there that can provide you with portfolio data and help with calculating your tax returns. Those tools include, CoinTracker, CoinLedger, TaxBit, TokenTax, ZenLedger and Cryptio. Most of them require you to import the read only api keys from exchanges and the public wallet address from any wallets you also want to track. 

With our TrustVault solution our customers have excellent data visibility. You can view transactions enriched with AML & DeFi data on the web or mobile apps, you can export to CSV, or query via APIs into an external tool like the ones above. 

Our scalable infrastructure means we can manage huge numbers of private keys and that allows us to offer every customer their own private key and wallet addresses. Every customer’s assets are segregated from others unlike some of our competitors who use omnibus accounts and commingle their assets making it impossible to use off the shelf accounting tools that rely on segregated addresses. This way you can keep your private keys safe and your assets secure while easily meeting your tax reporting requirements. 

The advantages don't stop there TrustVault also makes trading more secure and easier for DeFi fund managers as we combine our platform security with transaction controls like multisig or Firewall rules like allow lists (whitelists) and insurance coverage.

To find out more about our DeFi offering visit us here >> Institutional DeFi with Crypto Custodian Trustology

Ready to talk? Book a meeting >>

Talk to us


Related readings

Trustology Acquired By Bitpanda

Trustology Gets Full FCA Registration as Cryptoassets Firm

TrustVault. The Safest Crypto Account for Institutional Investors

High Yields Ahead - New Voyager DeFi Fund Backed By Trustology Custody



Stay up-to-date with the latest crypto news, events, and crypto custody with Trustology. Over 2000 subscribers receive our monthly round up of what made the headlines, upcoming events that institutions need to know about and the latest developments in crypto custody and to our TrustVault platform. Be in the know, sign up today.

Signup Now