How does the taxman address capital gains from investing in bitcoin?
Should the tax be paid when you sell the asset or when you recover the profit in your bank (trust) account?
I invested a little bit in bitcoin near the top of the last bull market (back in 2020), so I’ve spent most of that time with investment losses since then. Now I’m in the black again and wondering what I should do if I sell.
If I sold some bitcoins and kept the profits in my crypto account, would taxes be paid at that time or only when I withdraw real cash?
Do you have to pay CGT in bitcoin if it is held in your crypto account? Our experts answer
Angharad Carrick from This is Money says: Tax matters are complicated at the best of times, but the rules around cryptocurrencies can be even more confusing.
As this is a relatively new asset (bitcoin was invented in 2009), the tax office has introduced several new rules in recent years.
Among the changes is that cryptoassets are now included within the scope of capital gains tax (CGT), which is payable when an asset whose value has increased is sold.
It is the profit that is taxed, not the amount of money you receive, and you do not pay CGT if all your profits in a year fall within the tax-free allowance which is currently £3,000.
You may have to pay CGT when you sell your cryptocurrency, exchange it for a different type of crypto “token”, or use it to pay for goods or services.
You could also be liable if you give your tokens to someone else, unless it’s a gift to your spouse or common-law partner, but not if you donate them to a charity.
Most cryptocurrency investors haven’t had to think much about booking profits because the market has been relatively quiet after hitting a high in November 2021.
Since January, the price of bitcoin has skyrocketed, approaching $72,000 at one point, amid flows into the recently launched U.S. spot Bitcoin ETFs.
Other cryptocurrencies have seen a similar surge and although prices have recovered somewhat, cryptocurrency investors could make some significant profits.
If these are kept within the crypto account without transferring them to your normal bank account, are you liable to pay taxes?
We asked Catherine Heinen, FCCA of TaxAssist Accountants and James Carn, Associate Director of Private Client Tax at Evelyn Partners for your advice.
Taxes – You may need to calculate profits or losses if they are over the £3000 threshold
Catherine Heinen, FCCA, says: Gains on crypto assets for personal investment are normally subject to CGT. Taxable events include the sale, use of cryptoassets to purchase other cryptoassets or goods and services, gifting them, and exchanging them.
Donating tokens to charities will not trigger CGT liability.
Selling bitcoins and not withdrawing the funds to your bank account would be a taxable event and you would need to consider your CGT exposure.
James Carn of Evelyn Partners says: Cryptoassets such as bitcoin are taxable assets for capital gains tax purposes and therefore a capital gain or loss is realized for tax purposes whenever the asset is sold or otherwise disposed of, for example by giving away Bitcoin or using it to buy a good or service.
James Carn says you are responsible as soon as Bitcoin is sold, not when cash is withdrawn
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.
Divestitures also occur when one cryptoasset is sold for another cryptoasset and it is not possible to transfer the capital gains to replacement investments in cryptoassets.
If a taxpayer realizes a capital gain, they should consider setting aside a portion of their income to fund any taxes owed on the capital gain before reinvesting.
If this is not done, the taxpayer runs the risk of the replacement asset losing value, leaving them without sufficient funds to pay tax on the original gain. Unless a capital loss is actually realized in the same tax year as the capital gain, 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 disposition value less allowable costs.
Allowable costs include the amount paid for the asset, transaction fees, advertising, some professional costs and costs of carrying out a valuation or proration in order to calculate profits or losses. Any costs deducted from profits for income tax and the costs of crypto mining activities are not allowed as a deduction for CGT.
When it comes to the amount paid for the asset, HMRC has a system of ‘bundling’ assets. Disposals are compared first to same-day purchases and then to purchases made within the next 30 days. After this, each token type enters its own “pool” and has its own “combined allowed cost.”
Where you have suffered capital losses in previous years, you may be able to use them against capital gains. Losses can be carried forward indefinitely when reported to HMRC.
Catherine Heinen says you may be able to offset your gains against losses from previous years
You must report losses in the year they occur, but HMRC gives you up to four years to report them. After four years, if you still haven’t reported, you won’t be able to report or use those losses.
If you haven’t 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 when the asset is worth less than what you paid for it, although some relief may be available when the crypto asset has become worth “almost nothing.”
The CGT rate depends on your total income and the tax rate. The gain, once the annual exempt amount has been deducted, will be taxed on:
- Basic rate taxpayers: 10 percent
- Taxpayers with higher and additional rates: 20 percent
CGT must be paid to HMRC by 31 January following the end of the assessment year. For example, disposals made between 6 April 2024 and 5 April 2025 must be declared and tax paid to HMRC by 31 January 2026.
You must keep detailed records of all cryptocurrency transactions, including the type and number of tokens removed, the date of removal, the number of tokens remaining, the value of the tokens in GBP, and a record of the costs pooled before and after of the eliminations.
CGT can be a complex area, so it is important to speak to an accountant.
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