Capital Gains Tax on Cryptocurrency: What You Need to Know

What Is Cryptocurrency and How Does Capital Gains Tax Apply?

Cryptocurrency is a digital or virtual currency secured by cryptography, operating on blockchain technology. Popular examples include Bitcoin, Ethereum, and Ripple. These currencies can be bought, sold, or traded and have become a significant asset class for investors.

In the UK, HMRC treats cryptocurrency as an asset for tax purposes. When you sell, trade, or dispose of cryptocurrency, any profit made may be subject to Capital Gains Tax (CGT). Knowing how CGT applies to cryptocurrency transactions is essential to avoid unexpected tax liabilities.

How Is Capital Gains Tax Calculated on Cryptocurrency?

CGT on cryptocurrency is calculated based on the gain you make when selling, trading, or disposing of your digital assets. The taxable gain is the difference between the disposal value and the acquisition cost, minus any allowable expenses.

For example: If you bought 1 Bitcoin for £15,000 and later sold it for £25,000, your gain would be £10,000.

Allowable costs, such as transaction fees or exchange fees, can be deducted from the gain.

You must also consider pooling rules, where the costs of multiple cryptocurrency holdings are averaged to determine the acquisition cost for tax purposes.

What Crypto Transactions Are Taxable Under HMRC Rules?

HMRC considers the following cryptocurrency activities as taxable events:

• Selling Cryptocurrency: Disposing of cryptocurrency for cash.

• Exchanging Cryptocurrency: Swapping one cryptocurrency for another (e.g., Bitcoin to Ethereum).

• Using Cryptocurrency: Paying for goods or services with cryptocurrency.

• Gifting Cryptocurrency: Transferring cryptocurrency to another person, unless it’s to a spouse or civil partner.

Each of these events may trigger a CGT liability if a profit is made.

Capital Gains Tax Rates for Cryptocurrency in the UK

Up to and including 29th October 2024, disposals of these assets were taxed at 10% at the basic rate and 20% at the higher rate.

From 30th October 2024 onwards, these assets are charged at 18% at the basic rate and 24% at the higher rate, aligning the rates to the same rates as residential property.

Reliefs and Deductions for Cryptocurrency Capital Gains Tax

Several reliefs and deductions may help reduce your CGT liability on cryptocurrency transactions:

• Annual Exemption Allowance: Offset the first £3,000 of gains for the 2024 tax year.

• Transaction Costs: Deduct expenses like trading fees, transfer costs, and exchange charges.

• Spousal Transfers: Transfers to a spouse or civil partner are exempt from CGT, enabling you to use both partners’ allowances.

• Loss Relief: Offset any cryptocurrency losses against gains from the same or future tax years.

Proper planning and record-keeping are critical to maximising these reliefs.

Reporting Cryptocurreny Capital Gains to HMRC

You must report cryptocurrency gains to HMRC if:

Your total gains exceed the Annual Exemption Allowance.

Your total sales proceeds (even if no profit is made) exceed £49,200 for the 2024 tax year.

Gains are reported through your Self-Assessment Tax Return, and tax must be paid by the relevant deadline to avoid penalties.

Frequently Asked Questions About Capital Gains Tax on Cryptocurrency

Q: Do I pay CGT on every cryptocurrency transaction?

A: You pay CGT only if the transaction is a taxable event (e.g., selling, exchanging, or gifting) and results in a gain above the Annual Exemption Allowance.

Q: What if I lose money on cryptocurrency investments?

A: Losses can be declared to HMRC and used to offset gains from the same tax year or carried forward to reduce future gains.

Q: Is transferring cryptocurrency between wallets taxable?

A: No, transferring cryptocurrency between your own wallets does not trigger a CGT event, as it’s not considered a disposal.

Q: Do I need to pay CGT if I am paid in cryptocurrency?

A: Being paid in cryptocurrency is treated as income and subject to Income Tax, not CGT. However, when you dispose of that cryptocurrency, CGT may apply.

Q: How does HMRC know about my cryptocurrency transactions?

A: HMRC receives information from cryptocurrency exchanges and may use this to cross-check your tax return. Accurate reporting is essential to avoid penalties.

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