Cryptocurrency and working out your tax liabilities

Cryptocurrencies are proving volatile at the moment with values tanking and then picking up again as the market fluctuates.

But with an estimated more than two million currency holders in the UK, many may not be aware of their tax obligations when they sell their assets.

HM Revenue & Customs (HMRC) is contacting taxpayers who they believe hold cryptoassets, advising them of the potential capital gains tax (CGT) implications.

You might need to pay Capital Gains Tax when you:

• Sell your tokens
• Exchange your tokens for a different type of cryptoasset
• Use your tokens to pay for goods or services
• Give away your tokens to another person (unless it’s a gift to your spouse or civil partner)

If you donate tokens to charity, you may need to pay Capital Gains Tax on them.

Work out if you need to pay

Your gain is normally the difference between what you paid for an asset and what you sold it for. If the asset was free, you’ll need to use the market value when working out your gain.

You do not need to pay Capital Gains Tax on the value of the tokens that you’ve already paid Income Tax on. You’ll still need to pay Capital Gains Tax on the gain you make after you’ve received them.

You can deduct certain allowable costs, including a proportion of the pooled cost of your tokens when working out your gain.

You can also use capital losses to reduce your gain, but you’ll need to report them to HMRC first.

If your total taxable gain is above the annual tax-free allowance, you must report and pay Capital Gains Tax.

What counts as an allowable cost

You can deduct certain allowable costs when working out your gain, including the cost of:

• Transaction fees paid before the transaction is added to a blockchain
• Advertising for a buyer or seller
• Drawing up a contract for the transaction
• Making a valuation so you can work out your gain for that transaction

You cannot deduct:

• What you’ve already deducted against profits for Income Tax
• The cost of mining activities (like equipment or electricity)

How to report and pay
If you need to report and pay Capital Gains Tax, you can either:

• Complete a Self Assessment tax return at the end of the tax year
• Use the Capital Gains Tax real time service to report it straight away

The amount of tax due might be different if you are not a resident in the UK. If you complete a tax return, you must complete it in pounds sterling.

Records you must keep

You must keep separate records for each transaction as HMRC might ask to see your records if they carry out a compliance check.

For help and advice on related matters, contact our expert team today. Our expert team provides a comprehensive capital gains tax service.