I invested £10,000 in bitcoin at the end of 2020 and despite it falling from the November peak, I still tripled my money.
My initial investment of £10,000 is now worth around £30,000 and I am considering selling half of it and investing in some investment trusts I had my eye on, to take advantage of the lower prices after recent market falls.
Do I have to pay capital gains tax if I sell £15,000 worth of bitcoin? I did not realize any other gains this tax year. By email.
HMRC considers cryptocurrencies as assets because they are usually held as investments
It’s Money responds: Capital Gains Tax (CGT) is a tax on the profits you make when you sell an asset that has increased in value – in your case, bitcoin.
The tax authorities clarified that crypto-assets are not considered a currency but an investment and are therefore subject to capital gains tax.
You have to pay CGT when gains on an investment exceed the annual allowance of £12,300.
If your capital gains on all assets do not exceed the deduction, you must still report your gains on your tax return if you are registered for self-assessment and the total amount for which you sold the assets was greater four times your deduction. .
In your case, you plan to sell half of your £30,000 holding in bitcoins and collect £15,000. This is more than the capital gains tax allowance, however, you only pay tax on the gain you made and therefore need to consider what you paid for bitcoin in the first place. .
If you bought all the bitcoins you plan to sell at once in 2020 and their value doubled, then the £15,000 you cash out would have cost you around £7,500.
Your profit, ie capital gain, is therefore £7,500 and falls under that year’s CGT allowance, so there is no tax to pay.
This annual allowance runs out in less than a month, when the tax year ends on April 5 and cannot be rolled over.
If, on the other hand, you sold all your bitcoins at once, then you would make a profit or capital gain of £15,000 and you would have to pay tax on the £2,700 between the £12,300 CGT threshold and that.
An expert explains capital gains tax in more detail below.
James Carn, Associate Director of Tax Services for Private Clients at Tilney Smith & Williamson, responds: The need to report holdings of crypto assets to HMRC depends on the amount of realized gains and losses, as well as realized gains and losses during the tax year on any other assets.
HMRC considers cryptocurrencies as assets because they are usually held as investments, even speculative ones.
Profits made on sales may be subject to CGT and losses may be available to offset other capital gains.
But even when crypto-assets are used as currency to buy things, there is an assignment for tax purposes, which can contribute to a CGT liability.
In exceptional cases, an individual could be considered to be carrying on a financial trade in crypto-assets and, if so, any trading profit would be subject to income tax instead of capital gains tax. .
The criteria for determining whether or not a person is deemed to be “trading” in an asset are complex and rely on the interplay of a number of factors, including source of funding, frequency of transactions, method of acquisition and the time interval between the purchase and sale of the asset.
Business losses can be offset by other income that is more attractive than capital loss treatment.
HMRC is however likely to challenge a taxpayer who declares a loss related to a crypto-asset as a business loss, as there is a significant hurdle to clear in order to meet the business criteria.
Calculation of capital gains and losses
Carl explains: Individuals must calculate their gain or loss when selling their crypto-assets to find out if they have to pay CGT. An “assignment” includes:
– exchange crypto-assets for sterling, another fiat currency or another type of crypto-asset;
– use crypto-assets to pay for goods or services; and
– give crypto-assets to another person, in which case the proceeds received are deemed to be the market value of the sterling asset.
CGT will not be due on transfers between spouses or civil partners or on most charitable donations if the transfer is direct.
In addition to the amount originally paid for the asset, other costs may be deducted when calculating the gain or loss, including transaction fees, valuation fees and other specific professional fees.
The costs of mining activities are not included in eligible costs for CGT, but it is possible to deduct some of these costs from trading profits for income tax purposes.
HMRC requires share pooling rules to be applied when calculating gains and losses realized on disposals of crypto-assets.
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