Cryptoassets, including cryptocurrencies, can provide investors with taxable income – even if it’s in bitcoin or another cryptocurrency. Richard Cooper unpicks what investors, financial advisers and paraplanners need to know about applying tax law to cryptoassets.
In November last year, HMRC started sending ‘nudge’ letters to investors asking them to check they were paying the correct tax on revenue from cryptoasset holdings.
In the UK, most taxation falls under the capital gains tax (CGT) regime for cryptoassets. That is, unless you’re investing or mining cryptoassets as a business or being paid in crypto for your work.
Most UK-based investors are potentially liable to CGT on any profits or gains from disposals made on cryptoassets. Liability depends on the gains you’ve made on disposals during a tax year.
In this way, cryptoassets behave like other income. CGT is only payable if total gains from all relevant assets are above the tax-free allowance, which is £12,300 for 2022/2023.
And, as with other forms of income, you can deduct certain allowable costs, such as those incurred in valuing your assets and working out the gain. You can also deduct a proportion of the pooled cost of your tokens. (More of that below!)
You can also use capital losses to reduce your gain. Only if your total taxable gain is above the annual tax-free allowance, must you report it and pay capital gains tax.
What is a disposal?
The good news is if you just hold the cryptoasset and don’t trade it – there’s no tax to pay. However, trading tokens for a different type of token creates a disposal and that’s often what catches people out.
You’re deemed to have made a disposal if you’ve:
- sold tokens for money
- exchanged tokens for a different type of token
- used tokens to pay for goods or services
- given away tokens to another person, unless it’s a gift to your spouse or civil partner.
Pooling assets
You can pool assets to make calculating CGT easier.
Each type of token has its own pool. For example, if a person owns bitcoin, ether and Litecoin, they would have three pools. And each one would have its own ‘pooled allowable cost’ associated with it.
This pooled allowable cost changes as more tokens of that type are acquired and disposed of. Individuals need to keep a record of the amount spent on each type of token, as well as the pooled allowable cost of each pool.
There are some additional rules on buying and selling assets – of the same type on the same day or within 30 days – that mean they are excluded from pools.
Non-fungible tokens (NFTs) are separately identifiable and so are not pooled.
Valuing assets
It’s not easy to value assets. Many exchanges don’t use pounds sterling so you’ll need to convert the value of any gain or loss into pounds sterling before completing your self- assessment tax return.
Likewise, if your exchange of tokens is not in pounds sterling or doesn’t have a pounds-sterling value – for example, if bitcoin is exchanged for ether – you need to convert it into pounds sterling.
For tax purposes, you should take reasonable care when arriving at an converted valuation for the transaction and use a consistent methodology.
Remember, individuals are responsible for maintaining records as well as completing self-assessment tax returns.
What about losses?
Cryptoassets are volatile, so you may have made some losses on transactions over the tax year. You can also claim losses on assets that you still own if they become worthless or of ‘negligible value’ – for example for an asset that has ceased trading – by making a negligible value claim to HMRC.
Losses cannot be carried back to earlier years and must first be offset against any gains you make in the same year.
You have up to four years to register losses with HMRC. Then they can be offset against any gains above the annual exempt amount in future years and there is no time limit to them being used.
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