Crypto enters the books fast, but policies often lag. Purchases and sales get logged, then month-end arrives and the team is unsure how to value tokens, record gains, or explain custody. This section gives UK-focused rules of the road that also make sense to US readers with UK entities or offshore teams.
What this section covers
A practical guide to Crypto Accounting for UK SMEs: HMRC Treatment, Valuation, and Disclosure. You will see how to recognise crypto on day one, measure and test for impairment, treat gains and losses, disclose holdings, and keep evidence that stands up to review.
1) Recognition: what goes on the balance sheet
What counts as crypto
Cryptoassets such as Bitcoin, Ether, and similar tokens acquired for treasury, investment, or settlement.
Where they sit in UK GAAP
- Intangible asset (FRS 102): Default for tokens held for use or investment.
- Inventory: Only if you are a broker-trader holding tokens for resale in the ordinary course of business.
Initial recognition: Record at cost in GBP on the transaction date, including directly attributable fees. Revenue taken in crypto is measured at the fair value of the goods or services delivered, translated to GBP at that date.
2) Measurement: valuation and impairment
Cost model (typical for SMEs)
- Carry at cost less impairment.
- Crypto generally has no finite life, so you do not amortise.
- Test for impairment when indicators exist (price decline below carrying value, loss of access, protocol risks). Recognise impairment in profit or loss.
Revaluation model (less common)
- Allowed only if there is a reliable active market for the specific token and you apply the policy consistently.
- Upward revaluations go to equity (revaluation reserve), downward movements first offset that reserve and then go to profit or loss.
Practical valuation controls
- Fix a primary price source and a documented timestamp rule (for example, 23:59 London time).
- Keep a backup source and document variance thresholds.
- Use closing mid price; avoid mixing bid/ask across months.
3) Gains, losses, and derecognition
Routine disposals and exchanges
- On sale or on exchanging one token for another, remove the carrying amount and recognise the gain or loss in P&L.
- For multiple acquisitions of the same token, maintain a clear cost pool (e.g., pooled or specific-lot method) and apply it consistently.
FX is not the driver here
- Crypto is not legal tender under UK GAAP, so treat tokens as non-monetary.
- FX may still arise if your functional currency is not GBP or if fees settle in foreign currency.
4) HMRC tax treatment at a glance
Accounting sets the books; tax determines the return.
- Companies: Profits on disposals may be taxed as trading income if you operate a trading activity, otherwise generally under chargeable gains rules.
- Individuals: Typically capital gains rules, with pooling and allowable costs; special rules apply to airdrops, staking, and DeFi arrangements.
- VAT: Most investment-type token transfers are outside scope; supplying goods or services paid in crypto is still a taxable supply measured in GBP.
- Records must reconcile: Maintain dates, GBP values, fees, and wallet or exchange references for every transaction.
Always assess new flows such as staking, lending, or liquidity pools on their specific facts before concluding on tax.
5) Special cases controllers should pre-clear
- Tokens received for services rendered: Recognise revenue at GBP fair value on delivery, then treat the token holding under your measurement policy.
- Impaired or lost access: Evidence attempts to recover. Impair down to recoverable amount; consider derecognition if control is lost.
- Broker-traders: If inventory treatment applies, measure at the lower of cost and estimated selling price less costs to complete and sell; present margin as revenue.
- Custody with third parties: Assess counterparty risk, access rights, and whether arrangements meet cash-equivalent presentation (usually they do not).
6) Disclosure: what readers of the accounts need to see
At a minimum for UK GAAP (FRS 102), include:
- Accounting policy for classification and measurement of cryptoassets.
- Carrying amounts by major token or in sensible groupings.
- Revaluation and impairment movements, with where they were recognised.
- Sensitivity or narrative on price risk and liquidity risk.
- Custody and control: storage method (cold vs hot), key management, reliance on third-party custodians, insurance if any.
- Subsequent events: Material price movements after the reporting date, if relevant to users’ decisions.
US readers preparing group reporting should align UK disclosures with group policies and add IFRS or US GAAP bridging notes as needed.
7) Recordkeeping that survives audit
Create a repeatable evidence pack:
- Master asset register: token, acquisition date, quantity, GBP cost, fees, wallet/exchange.
- Wallet evidence: addresses, screenshots or signed messages proving control.
- Exchange statements: monthly exports with trade IDs and fee detail.
- Pricing log: source, timestamp, and the exact rate used each month.
- Board approvals: treasury mandate, risk limits, and who can move funds.
- Segregation of duties: distinct initiator, approver, and reconciler; maker-checker on all transfers.
- Incident log: downtime, forks, stuck transactions, or security events.
For offshore teams, use a standard folder structure and restrict access to seed phrases and hardware devices.
8) Close and audit workflow (UK SME checklist)
- Reconcile on-chain balances and exchange balances to the GL.
- Update cost pools and disposal lots; review impairment indicators.
- Refresh month-end prices under the documented policy; retain screenshots.
- Review legal and tax positions for new token types or DeFi arrangements.
- Prepare disclosure tables and subsequent-events assessment.
- Controller sign-off and evidence pack archived.
Summary
Keep it simple and defensible. Classify correctly on day one, measure under a clear policy, and tie every number back to a price source and a transaction record. With that foundation, disclosures read cleanly and tax follows the facts.
