Tax and cryptocurrency – Questions on Wednesday

by | Feb 10, 2021 | Questions on Wednesday, Tax

When Elon Musk announced Tesla was putting $1.5 billion of cash into Bitcoin, also accepting it as payment on Monday, the price went one way. Bitcoin is a highly volatile cryptocurrency and the hysteria that was seen in late 2017 seems to be coming back. The difference now though is this boom is reinforced by a company in the S&P 500. And as the article says, that means anyone invested in the S&P 500 is effectively invested in Bitcoin.

For many who have invested astutely, this will be good news. Understandably so, some of those people will be keen to lock their profits and cash out.

But – how does the tax work?

Crypto was a bit of an enigma for most, even HMRC in the earlier days. However another difference between 2017 and 2021 is there is better guidance. So, it feels very topical for Questions on Wednesday to write some quick pointers around cryptocurrency and the tax involved. it is a complex area, but here are the key points.

What taxes apply to cryptocurrency?

Principally, if you dispose of (or sell) cryptocurrency and make a profit, it becomes subject to Capital Gains Tax. Income tax is rare for cryptocurrency. HMRC cites examples of receiving an income for activities such as mining, or if you receive cryptocurrency in lieu of payment as part of your job. If your principal income is from the trading of cryptocurrency, it may constitute as a trade and income tax takes precedence, as opposed to a series of capital gains. There are rules and case law around this to consider.

How does Capital Gains Tax work on cryptocurrency?

Capital Gains Tax is charged at the point of you making a disposal. A disposal is anything from selling cryptocurrency for money, exchanging for a different type of cryptocurrency, giving cryptocurrency away to someone else (except a spouse, see below) or using it to buy goods and services. Given the nature of how people buy and sell units, it is therefore very important you keep a detailed log of all transactions, units, dates, and values associated with the currency.

When you make a disposal, that disposal is charged Capital Gains Tax.

Before you pay tax, you first have an annual allowance of £12,300 to utilise. If your gain is less than £12,300, you won’t have Capital Gains Tax to pay, provided you’ve not used your allowance for anything else in the tax year. After this point, your gain is taxed on two bands:

  • 10% for basic rate taxpayers
  • 20% for higher rate taxpayers

Here’s a quick example.

Joe Bloggs has made a gain of £15,000 on Cryptocurrency and has exited his investment for cash.

The first £12,300 is covered by his annual allowance.

The remaining £2,700 is taxable.

As Joe is a basic rate taxpayer, that is taxed at 10%, meaning £270 of capital gains tax is due.

Any gains you make should be included on your self assessment tax return. Be careful too as any gains can raise your income above the higher rate mark, meaning you have a partial rate in place. That is, some of your gain at 10% and some of it at 20%.

If you exchange for another cryptocurrency triggering a gain, you will need to convert that effective gain into GBP. for your tax return at the correct rate.

What costs can I offset my cryptocurrency profits against?

Aside from the consideration (i.e. how much you originally paid for the currency), you can also claim for costs for buying and selling the currency. These include transaction fees, any professional fees for assisting with the acquisition or disposal of cryptocurrency, costs for making valuations or advertising costs to find a buyer.

What if I have made losses?

You can offset gains from losses you’ve made in the past. Losses need to either be declared on your self assessment tax return, or you must write to HMRC within four years of the loss. Therefore this this should also be in your thoughts especially if you’ve been trading for some time. Once it’s declared, you can hold onto those losses forever.

Can I transfer assets to my spouse?

Yes, you can and transferring cryptocurrency to your spouse could help make the most of their allowance too. The gain though is still based on what the currency was bought for originally, not the value of it at the point of transfer.

Is it worth making a disposal now?

First, we cannot ever give financial advice of any sort, nor does this constitute as financial advice. We are not qualified to do so.

However, what we can say is that every tax year you receive an annual capital gains allowance. It’s currently £12,300. This allowance will reset on the 6th of April and you cannot carry it forward. It is a case of use it or lose it. There could be tax benefits in making a disposal either side of the tax year, if your portfolio and profits allow so.

Another thought is that there are rumours that Capital Gains Tax is set to increase. Again, this is pure speculation, but it is worth keeping your eyes on the upcoming Budget, to see if Capital Gains Tax rates do go up.

If you have been trading in cryptocurrency and have a gain to declare, find out how we can help.

Ready to start the journey?

To get help with your accounts and start freeing up your time to focus on growth, talk to the Mayflower team today.

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