Understanding Capital Gains Tax implications for cryptocurrency trades

Cryptocurrency has rapidly evolved from a technological novelty to a serious asset class recognised by many investors around the globe.

However, as the popularity of digital currencies like Bitcoin, Ethereum, and others continues to grow, so does the scrutiny from tax authorities.

How is CGT applied to cryptocurrency?

Any profit made by cryptocurrency investors from the transfer, exchange, or sale of digital coins or tokens is potentially subject to Capital Gains Tax (CGT).

For UK taxpayers, cryptocurrencies are considered assets for CGT purposes.

Every time you sell, exchange, spend, or gift your crypto, it may result in a capital gain or loss. Here are a few scenarios where CGT could apply:

  • Selling cryptocurrencies for Government-issued currency (fiat money)
  • Exchanging one type of cryptocurrency for another
  • Using cryptocurrencies to pay for goods or services
  • Gifting cryptocurrencies (though gifts to your spouse or civil partner are exempt)

Calculating your capital gains

To calculate your gain or loss, you must first establish the base cost of your crypto asset.

This involves summing up the purchase price, transaction fees, and any other costs associated with acquiring the crypto.

When you dispose of the cryptocurrency, subtract the base cost from the disposal value to determine your gain or loss.

If your total gains exceed the annual CGT allowance (which is £3,000 for the tax year 2024-2025), you will need to report and pay CGT on the excess.

For gains within the allowance, there is no tax to pay, but keeping records is crucial, as you may need them for future tax calculations.

Planning and easing CGT on cryptocurrency

  • Make sure you use your CGT exemption each year; it cannot be carried over.
  • If you sell cryptocurrency at a loss, you can offset this loss against any future gains to reduce your tax liability.
  • Consider the timing of selling your assets. If possible, spread disposals across tax years to maximise the use of your CGT allowance.
  • Maintain detailed records of all your cryptocurrency transactions, including dates, amounts, and the type of transaction. This documentation will be invaluable for preparing your tax return.

What happens if you fail to report?

If you fail to declare crypto on your tax return, you could be liable to additional interest and penalties.

If you haven’t been reporting your gains or losses in previous years, you can rectify this by submitting an amended self-assessment tax return to HMRC.

The future of crypto taxation

The cryptocurrency market is in a relatively infant stage, so as it matures, we can expect further clarity and changes to the tax regulations surrounding digital assets.

Keeping abreast of these changes is crucial to ensure compliance and optimise your tax position.

As crypto regulations continue to evolve, having expert guidance will ensure that you not only remain compliant but also make the most out of your investments.

For more help and advice on CGT and your cryptoassets, please contact us today.

Posted in Blog.