Cashing out crypto gains? Beware the CGT trap as taxman cracks down on bitcoin boom
- Bitcoin soared to a record $89,000 a coin before falling back
- Many speculators will be tempted to cash in on gains
- They could face a potential tax bill with HMRC cracking down on crypto
Bitcoin surged beyond $89,000 for the first time as the cryptocurrency is buoyed by the effects of Donald Trump's victory in the US election and the resulting 'Trump Trade'.
It was trading at $87,040 at midday on Tuesday, as it fell back from Monday's record high.
The rest of the crypto market has also seen a boost, with coins such as cardano, solana and dogecoin also jumping on the back of the rises.
With a large number of cryptos increasing in value - and plenty of speculators having gone into hodl (holding on for dear life) mode in recent years - it's likely many will be keen to cash out their gains.
Crypto surge: Bitcoin isn't the only digital currency on the rise, with countless others reporting massive gains since the election
However, these investors may also be concerned about what tax they may need to pay if they cash out their holdings - or haven't considered it whatsoever, believing crypto is 'secretive' and therefore shielded from the taxman.
James Carn, of Evelyn Partners, says: 'The surging price of bitcoin will see many crypto-investors in the UK take some profits – but how many will be aware that, in certain circumstances, they should be declaring the sale to HMRC on a self-assessment tax return?'
You will be liable for paying capital gains on your crypto assets at various different times, such as when you sell crypto for real currency, exchange one crypto for another, use crypto to pay for something or even if you give them away, including to charity.
Transfers to a spouse or civil partner are expempt from capital gains tax.
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How do I calculate capital gains on crypto assets?
CGT applies in these circumstances when your net gains across all of your invested assets exceed your annual allowance.
This means you need to calculate your gain for each transaction you make, generally the difference between what you paid for them, including transaction costs, and what you sold the assets for.
You need to do this for every crypto disposal during the tax year to calculate your net gain or loss.
Any losses you make can be offset against your gains.
Gains in your crypto assets should be calculated in pounds sterling, rather than in US dollars and subsequently converted.
On the most basic level, your CGT liability will be affected by your annual salary.
Following the Budget, higher rate taxpayers pay 24 per cent on gains from assets, including investments. Additional rate taxpayers, that is those earning more than £125,140, also pay 24 per cent.
Meanwhile, Basic rate taxpayers, those earning less than £50,271 per year, pay 18 per cent in capital gains.
This is charged over your capital gains allowance of £3,000. If you jointly own assets with another person, you can make double the profit between you without being charged.
Generally, most investors will make use of their £20,000 Isa allowance in order to protect their investments.
However, cryptocurrencies cannot be held within an Isa wrapper, meaning this option is not available to crypto investors.
How does HMRC track crypto holdings?
Some crypto holders may have recently received a 'nudge' letter from HMRC, indicating you need to check if you are underreporting your tax liability.
These letters form part of HMRC's crackdown on crypto asset tax evasion, with the taxman able to track crypto transactions through data-sharing agreements and the international Crypto Asset Reporting Framework.
Crypto is by no means a hidden class of assets. Blockchains exist as public ledgers, with all transactions recorded. These records but can be traced back to the asset holders themselves.
Crypto exchanges use the personal information of users to link their identities with their crypto transactions, allowing HMRC to track crypto holdings.
HMRC can request this information from exchanges, with the exchanges legally obliged to provide it.
Mr Carn says: 'Crypto's rapid appreciation coincides with a tighter tax environment for investors in the UK, so if holders of bitcoin and other digital currencies decide to cash in or take profits, they need to watch out for a potential tax liability, or they could fall foul of HMRC.
'HMRC has been closing in on crypto profits, where it estimates there are high rates of non-compliance, in terms of gains not being declared.
'The tax treatment of crypto assets can be complex. However, in simple terms HMRC sees the profit or loss made on buying and selling of exchange tokens as within the scope of CGT.
'Its guidance says that only in exceptional circumstances will HMRC accept that buying and selling of crypto amounts to a trade for tax purposes – and would therefore be included in income tax liabilities instead.'
Can a crypto wallet protect me from CGT?
The private nature of crypto wallets may lead investors to believe that their transactions will not be reported to HMRC.
This is not the case.
Crypto wallets are subject to the same data sharing agreements as crypto exchanges.
This means that information on your transactions, such as transferring your holdings to a different cryptocurrency, will be shared with HMRC and you will be liable to pay tax on any gains.
Again, despite private wallets being pseudonymous, giving many crypto investors the illusion of anonymity, the transaction history is public and available for all to see.
Blockchain analysis can generally match transaction data with known addresses, allowing HMRC access to personal information and transaction data, meaning that they can track your gains.
Mr Carn adds: 'For individuals, the basic message is that, if you have sold crypto for a profit during the tax year, you may have to report it by filing a tax return and you may owe tax.
'This is all the more pertinent now that the CGT regime in the UK has become more restrictive.'
HMRC warns that failure to declare gains can result in additional interest and penalties.
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