Home Money Withdraw crypto profits? Watch out for CGT trap as taxman cracks down on bitcoin boom

Withdraw crypto profits? Watch out for CGT trap as taxman cracks down on bitcoin boom

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Cryptocurrency Rise: Bitcoin is not the only digital currency on the rise, as many others have reported massive gains since the election.

Bitcoin surpassed $89,000 for the first time as the cryptocurrency is boosted by the effects of Donald Trump’s victory in the US election and the resulting “Trump Trade.”

At midday Tuesday it was trading at $87,040, retreating from Monday’s all-time high.

The rest of the cryptocurrency market has also seen momentum, with coins like cardano, solana, and dogecoin also rising.

With a large number of cryptocurrencies rising in value, and many speculators having gone into hodl mode in recent years, it is likely that many will be willing to cash out their profits.

Cryptocurrency Rise: Bitcoin is not the only digital currency on the rise, as many others have reported massive gains since the election.

However, these investors may also be worried about the tax they will have to pay if they withdraw their holdings, or have not considered it at all, believing that cryptocurrencies are “secret” and therefore protected from the taxman.

James Carn of Evelyn Partners says: “The rising price of bitcoin will see many crypto investors in the UK make some profits, but how many will be aware that in certain circumstances they would need to declare the sale to HMRC within a certain timeframe?” ? Self-assessed tax return?

You will be responsible for paying capital gains on your crypto assets at different times, such as when you sell cryptocurrencies for real currency, exchange one crypto for another, use cryptocurrencies to pay for something, or even if you give them away, including to charities. .

Transfers to a spouse or common-law partner are exempt from capital gains tax.

How do I calculate capital gains on crypto assets?

CGT applies in these circumstances when your net gains on all your invested assets exceed your annual allowance.

This means you must calculate your profit for each transaction you make, usually the difference between what you paid for them, including transaction costs, and the price you sold the assets for.

You must do this for each cryptocurrency disposal during the tax year to calculate your net profit or loss.

Any losses you experience can be offset by your profits.

Profits on your crypto assets must be calculated in British Pounds, rather than US Dollars, and subsequently converted.

At the most basic level, your CGT liability will be affected by your annual salary.

According to the Budget, higher rate taxpayers pay 24 per cent on profits from assets, including investments. Additional rate taxpayers, i.e. those earning more than £125,140, ​​also pay 24 per cent.

Meanwhile, basic rate taxpayers – those earning less than £50,271 a year – pay 18 per cent in capital gains.

This is charged against your capital gains allowance of £3,000. If you own property jointly with another person, you can get double the benefit between you both without being charged.

Generally, most investors will make use of their £20,000 Isa allowance to protect their investments.

However, cryptocurrencies cannot be held within an Isa container, meaning this option is not available to cryptocurrency investors.

How does HMRC track cryptocurrency holdings?

Some cryptocurrency holders may have recently received a “nudge” letter from HMRC, stating that they should check whether they are under-reporting their tax liability.

These letters form part of HMRC’s fight against crypto asset tax evasion, and the taxman can trace crypto transactions through data sharing agreements and the international crypto asset reporting framework.

Cryptocurrencies are by no means a hidden asset class. Blockchains exist as public ledgers, in which all transactions are recorded. These records, however, can be traced back to the asset holders themselves.

Crypto exchanges use users’ personal information to link their identities to their crypto transactions, allowing HMRC to track crypto holdings.

HMRC may request this information from exchanges, and exchanges are legally required to provide it.

Carn says: “The rapid appreciation of cryptocurrencies coincides with a stricter tax environment for investors in the UK, so if holders of bitcoin and other digital currencies decide to cash out or take profits, they should be wary of potential liability. tax, or you could fall out of favor with HMRC.

‘HMRC has been approaching crypto profits, where it estimates there are high default rates, in terms of unreported profits.

‘The tax treatment of cryptoassets can be complex. However, in simple terms, HMRC considers profits or losses made on the purchase and sale of exchange tokens to be within the scope of CGT.

“Their guidance says that only in exceptional circumstances will HMRC accept that the buying and selling of cryptocurrencies amounts to a transaction for tax purposes and would therefore fall under income tax liabilities.”

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 about 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, even though private wallets are pseudonymous, giving many cryptocurrency investors the illusion of anonymity, transaction history is public and available for everyone to see.

Blockchain analysis can usually match transaction data to known addresses, allowing HMRC to access personal information and transaction data, meaning they can track your profits.

Carn adds: “For individuals, the basic message is that if they have sold cryptocurrency for a profit during the tax year, they may have to declare it by filing a tax return and may owe taxes.”

“This is even more pertinent now that the CGT regime in the UK has become more restrictive.”

HMRC warns that failing to declare profits can lead to additional interest and penalties.

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