Capital Gains Tax and Cryptocurrency
Capital Gains Tax (CGT) is paid when you make a gain through the sale of certain assets. If the gain made goes over the yearly tax-free exemption of £12,300 (tax year 2022/23), you will be subject to CGT. With the ever-growing presence of cryptocurrency and more specifically, crypto “exchange tokens” being disposed of, you must be aware of the potential obligation to pay Capital Gains Tax on such transactions. CGT will be charged at 10% / 20% or a combination of the two rates depending on the level of gain made and your income for the year of the gain.
What should I be doing if I own cryptocurrency?
It is advisable to keep records of each transaction you make regarding cryptocurrency to ensure you’re complying with the relevant CGT legislation. HM Revenue and Customs (“HMRC”) may wish to see a copy of your records if they are conducting compliance checks. Your records should consist of the following information:
- The types of tokens you hold
- The dates you disposed of them
- The number of tokens you’ve disposed of
- The number of remaining tokens you have
- The value of the tokens being disposed of in pound sterling
- The relevant bank statements and wallet addresses
- A record of the pooled costs before and after you disposed of them
How do I know if I need to pay Capital Gains Tax?
In order to figure out whether you need to pay CGT, you must first calculate whether you have made a gain on a transaction. This is done by calculating the difference between what you paid for a specific asset and what it sold for. If the gain is above the annual tax-free exemption, you must report it to HMRC, and CGT must be paid. If you have made a loss on a transaction, the loss can be carried forward indefinitely and set against any gain you may make in the future that is excess of that year’s annual exemption. It is therefore important to make a claim for any losses you make.
You are still under an obligation to report any gains with the annual exemption and any losses to HMRC if the proceeds from the transaction, and all other disposals in a tax year, exceed 4 times the annual exemption (i.e., £49,200 for 2022/23).
What does it mean to “Pool” the cost of your tokens?
Like shares, if you own more than one type of cryptocurrency, you can group each type of token into their respective “pools” to work out the total “pooled” cost of each type of token, this is important if you do not dispose of all the tokens in one go. When selling tokens, you may be charged certain costs for doing so. These costs can be deducted from the overall gain to reduce the amount chargeable to CGT.
When keeping records of transactions, it is best to keep a record of each pool. When buying a token, add the amount paid to the appropriate pool. When selling, deduct the proportion of the cost of sale from the pool.
What costs can I deduct from any gains I make?
The following costs can be deducted from a calculated gain:
- transaction fees paid before the transaction is added to a blockchain
- advertising for a buyer or seller
- drawing up a contract for the transaction
- making a valuation so you can work out your gain for that transaction
Do I only pay Capital Gains Tax if I am selling my tokens?
You may also need to pay CGT if you are exchanging your tokens for a different type of currency, giving away tokens to another person who is not your spouse or civil partner, or using your tokens to pay for goods and services. Please note, if you are buying or selling the same type of token on the same day or within 30 days, the rules for calculating CGT on such transactions are different.
What are the next steps?
If you need assistance to understand if you need to pay Capital Gains Tax on a transaction you have made, then please contact us. We can give confirmation of the correct position, calculate any gains and losses, and assist with completing a self-assessment tax return or using the Capital Gains Tax real time service to report a gain or loss immediately if required.
Please note that the legislation, allowances, exemptions, and tax rates shown are correct at the time of the article and are subject to change. Please take up to date professional advice before making any decisions regarding your investments and capital gains tax. This article does not provide investment advice.