With the extended tax return grace period just expired, those who have neglected to report gains on bitcoin or other crypto-asset sales in the 2020-2021 tax year should check if they need to or risk falling foul of HMRC rules, with the penalties that can involve. But how do you know if you need to?
The main thing to watch out for is triggering capital gains tax (CGT) on profits realised above the annual allowance of £12,300. Even if your capital gains across all assets don’t breach the allowance, you still need to report your gains in your tax return if you’re registered for Self Assessment, and the total amount you sold the assets for was more than four times your allowance.
James Carn, Associate Director of Private Client Tax Services at Tilney Smith & Williamson, has run the rule over the issue:
Whether you need to declare crypto-asset holdings to HMRC depends on the amount of any realised gains and losses, together with gains and losses realised in the tax year on any other assets. HMRC considers cryptocurrencies to be assets because typically they are held as investments, however speculative.
Profits realised on sales may be subject to CGT and losses could be available to offset against other capital gains. But even where crypto-assets are used as a currency to buy things, there is a disposal for tax purposes, which may contribute to a CGT liability.
In exceptional cases, an individual could be treated as carrying on a financial trade in crypto-assets and, if this is the case, any trading profits would be subject to income tax instead of capital gains tax.
The tests to determine whether or not an individual is deemed to be ‘trading’ in an asset are complex and are based on the interaction of a number of factors, including the source of financing, the frequency of transactions, the method of acquisition and the interval of time between the purchase and sale of the asset.
Trading losses can be offset against other income which is more attractive than the capital loss treatment. HMRC is, however, likely to challenge a taxpayer who reports a crypto-asset related loss as a trading loss because there is a high hurdle to clear in order to meet the trading criteria.
In addition, individuals may be liable to pay income tax and, in some circumstances, national insurance contributions, on crypto-assets that they receive from:
- their employer as a form of non-cash payment, in return for services provided; and
- mining, staking, transaction confirmation or airdrops received in return for a service.
Calculating capital gains and losses
Individuals need to calculate their gain or loss when they dispose of their crypto-assets to find out whether they need to pay CGT. A ‘disposal’ includes:
- exchanging crypto-assets for sterling, another fiat currency, or for a different type of crypto-asset;
- using crypto-assets to pay for goods or services; and
- giving away crypto-assets to another person, in which case the proceeds received are deemed to be the market value of the holding in sterling.
CGT will not be due on transfers between spouses or civil partners or on most gifts to charity if the transfer is direct.
As well as the amount originally paid for the asset, other costs can be deducted when calculating the gain or loss, including transaction fees, valuation fees and specific other professional fees.
Costs for mining activities do not count toward allowable costs for CGT but it is possible to deduct some of these costs against trading profits for income tax. HMRC requires share pooling rules to be applied when calculating gains and losses realised on disposals of crypto-assets.
The 30-day rule
Holders of crypto-assets, just like share owners, need to be aware of this, particularly as trading in such assets can be high frequency. This rule prevents people from reducing or avoiding CGT liability by selling shares and then buying them back immediately afterwards. If they use up their annual CGT allowance to do this, they can then avoid future CGT liability because the purchase price is much higher than it otherwise would have been.
If you sell shares you should wait 30 days before re-investing in the same shares. If you don’t then ‘matching’ rules apply which in effect stop the cost base from being reset. The same applies to crypto-assets. Frequent buying and selling of crypto-assets can therefore make CGT liabilities even trickier to calculate.
Crypto holdings are an asset that will form part of your estate when you die, and may therefore help to bring your estate above the IHT liability threshold. This also has implications for gifts of crypto-assets to family members and other individuals or transfers to trusts or companies before you die.