How does the taxman deal with capital gains from investing in bitcoin?
Is the tax due when you sell the asset or when you realise the benefit back in your (fiat) bank account?
I invested a little in bitcoin near the top of the last bull market (back in 2020) so have spent most of that time since then with investment losses. I’m now back in the black and wondering what I need to do if I sell.
If I sold some bitcoin and kept the proceeds in my crypto account would tax be due then, or only when I withdrew actual cash?
Angharad Carrick of This Is Money says: Tax affairs are complicated at the best of times but rules around cryptocurrencies can be even more confusing.
Given they are a relatively new asset – bitcoin was invented in 2009 – the tax office has been introducing various new rules over the last few years.
Among the changes are that crypto assets are now included within the remit of capital gains tax (CGT), which is paid when you sell an asset that has increased in value.
It is the gain that is taxed, rather than the amount of money you receive, and you do not pay CGT if all your gains in a year fall under the tax-free allowance which is currently £3,000.
You might have to pay CGT when you sell your cryptocurrency, exchange it for a different type of crypto ‘token’ or use them to pay for goods or services.
You might also be liable if you give away your tokens to another person, unless it’s a gift to your spouse or civil partner, but not if you donate them to charity.
Most crypto investors have not had to think much about registering any gains because the market has been relatively muted after hitting a high in November 2021.
Since January the price of bitcoin has soared, nearing $72,000 at one point, amid flows into the newly launched US spot Bitcoin ETFs.
Other cryptocurrencies have seen a similar rise, and while prices have paired back somewhat, crypto investors could be sitting on some significant gains.
If these are kept within the crypto account without transferring to your normal bank account, are you liable to pay tax?
We asked Catherine Heinen, FCCA of TaxAssist Accountants and James Carn, associate director in Private Client tax at Evelyn Partners for their advice.
Catherine Heinen, FCCA, says: Gains on cryptoassets for personal investment are normally subject to CGT. Taxable events include selling, using cryptoassets to buy other cryptoassets or goods and services, gifting them and swapping them.
Donating tokens to charity will not incur a CGT liability.
Selling bitcoin and not withdrawing the funds to your bank account would be a taxable event and you’d need to consider your exposure to CGT.
James Carn of Evelyn Partners says: Crypto assets such as bitcoin are chargeable assets for capital gains tax purposes and so a capital gain or loss is realised for tax purposes whenever the asset is sold or otherwise disposed of, for example by giving the Bitcoin away or using it to purchase a good or a service.
The tax point is when the bitcoin is sold, not when cash is withdrawn from a wallet. It is important to note that disposals are not limited to conversion into fiat currency, such as Sterling.
Disposals also occur when one crypto asset is sold for another crypto asset and it is not possible to roll over capital gains into replacement crypto asset investments.
If a taxpayer does realise a capital gain they should consider reserving a portion of their proceeds to fund any tax due on the capital gain before reinvesting.
If this is not done then the taxpayer runs the risk of a replacement asset falling in value, leaving them with insufficient funds to pay the tax on the original gain. Unless a capital loss is actually realised in the same tax year as the capital gain then it is not possible to offset the loss against the gain.
How to calculate a capital gain and loss
Heinen says: A capital gain is calculated as the value at disposal less allowable costs.
Allowable costs include the amount paid for the asset, transaction fees, advertising, some professional costs and costs of making a valuation or apportionment to be able to calculate gains or losses. Any costs deducted from profits for income tax and costs for crypto mining activities are not allowable as a deduction for CGT.
When it comes to the amount paid for the asset, HMRC has a system of ‘pooling’ assets. Disposals are first matched with purchases on the same day, and then with purchases within the next 30 days. After this, each type of token enters its own ‘pool’ and has its own ‘pooled allowable cost’.
Where you’ve made capital losses in previous years, these may be available to use against capital gains. Losses can be carried forward indefinitely where they are reported to HMRC.
You should report losses in the year they occur, but HMRC gives you up to four years to report these. After four years, if not already reported, you won’t be able to report and use those losses.
If you have not reported losses, you may need to amend your tax return. If no tax return was required for those years, you can write to HMRC to report the losses.
Loss relief is not available where the asset is worth less than you paid for it, although some relief may be available where the crypto asset has become worth ‘next to nothing’.
The rate of CGT depends on your total earnings and tax rate. The gain, after deduction of the annual exempt amount, will be taxed at either:
- Basic rate taxpayers: 10 per cent
- Higher and additional rate taxpayers: 20 per cent
CGT is due to be paid to HMRC by 31 January following the end of the year of assessment. For example, disposals made between 6 April 2024 and 5 April 2025 must be reported and the tax paid to HMRC by 31 January 2026.
You must keep detailed records of all cryptocurrency transactions, including the type and number of tokens disposed of, disposal date, number of tokens remaining, value of tokens in pounds Sterling and a record of the pooled costs before and after disposals.
CGT can be a complex area, so it is important to speak to an accountant.
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