Cryptocurrencies and Capital Gains Tax

Introduction

Understanding Capital Gains Tax on Crypto in The UK

Cryptocurrency, with its rollercoaster of ups and downs, isn’t just about trading and HODL-ing. In the UK, when you sell, swap, or even use crypto, it’s seen as a taxable event. This is where Capital Gains Tax comes into the picture.

Capital Gains Tax-Free Allowance

Every individual in the UK has a Capital Gains tax-free allowance of £12,300. What does this mean for you as a crypto enthusiast? If your crypto profits are below this threshold within a tax year, there’s no need to pay Capital Gains Tax or report these profits to HMRC.

When Do You Pay Capital Gains Tax on Crypto?

Here are four main situations where Capital Gains Tax kicks in for crypto profits:

• Selling Crypto for £GBP: If you sell your crypto for more than your purchase price, the difference is your taxable profit.
• Swapping Crypto for Crypto: When you exchange one crypto token for another, any profit made between the buying and swapping of the original token is taxable.
• Gifting Crypto: Giving away crypto (except to your spouse or civil partner) triggers Capital Gains Tax on any profit made from the time of purchase to the time of gifting.
• Using Crypto for Goods and Services: Spending your crypto? You’ll need to pay Capital Gains Tax on the profit made between buying the crypto and spending it.

Remember, it doesn’t matter how quickly you make these profits. Whether it’s over the course of hours or years, the Capital Gains Tax rate remains the same.

Want to speak to a CGT expert? Find out more about our crypto capital gains tax advice service.

Calculating Your Capital Gains Tax Liability

Let’s break down how to calculate your capital gains liabilities in four straightforward steps:

1 – Find the transactions classed as profits

These are the main crypto earnings that are considered a profit:

• Selling crypto for GBP
• Exchanging crypto for other crypto
• Giving crypto as a gift (except to spouses or civil partners)
• Using crypto to buy goods or services

2 – Calculate your cost basis

When you’re working out your crypto taxes, knowing your ‘cost basis’ is key. This is basically what you’ve spent to get and hold onto your crypto. It’s not just the price you paid to buy the crypto, but also any fees you had to pay during the purchase.

Imagine it like this: You buy 1 Bitcoin (BTC) for £25,000. But you also had to pay an extra £250 as a fee when you bought it. So, your total cost isn’t just £25,000; it’s actually £25,250. This total amount – the price plus the fee – is what we call your ‘cost basis’.

It’s really important to include these fees because they add to your total investment in the crypto. When you sell or swap your crypto later, you’ll use this cost basis to figure out if you’ve made money (a profit) or not. This way, you’re keeping track of everything you’ve spent, not just the buying price.

3 – Deduct cost basis from disposal value

Next step in figuring out your crypto taxes is to find out how much your crypto was worth when you sold it, swapped it with another crypto, gave it as a gift, or used it to buy something. Once you know that value, you take away the cost basis to find out how much profit you made.

Following the same example as above, if you later sell that bitcoin for £30,000, simply subtract your cost basis. In this case, it would be £25,250, leaving you with a profit of £4,750.

This profit is what you’ll need to think about for Capital Gains Tax. It’s pretty straightforward – just work out how much your crypto was worth when you got rid of it, take away what you spent to get it, and there’s your profit!

4 – Figure out your Capital Gains tax rate

The last step in working out your crypto taxes is to figure out your Capital Gains Tax rate. This rate depends on how much you usually earn in a year, which is your ‘Income Tax band.’

Here’s a quick guide:

• If you earn up to £50,270 a year, you’re in the ‘Basic Rate’ band. Your Capital Gains Tax rate is 10%.
• If you earn between £50,270 and £150,000, you’re in the ‘Higher Rate’ band. Your rate is 20%.
• If you earn over £150,000, you’re in the ‘Additional Rate’ band. Again, your rate is 20%.

For example, let’s say you’re in the Basic Rate band and you’ve made £15,000 profit from selling crypto. Remember, everyone gets a tax-free allowance of £12,300. So, you only pay tax on the profit that’s over this allowance.

In this case, you take your £15,000 profit, subtract the £12,300 allowance, and you’re left with £2,700. Since you’re in the Basic Rate band, you’ll pay 10% of this £2,700 as Capital Gains Tax. So, your tax would be £270.

Navigate Crypto Taxes with Confidence

The world of cryptocurrencies is an exciting one, but crypto tax needs careful consideration. From understanding your tax-free allowance to calculating crypto tax profits, each step helps you stay compliant and make the most of your crypto investments.

That being said, we know that finding your way through crypto tax can feel a bit like navigating uncharted waters. That’s where we come in. We’re committed to providing you with honest, experience-driven advice to help you with all things related to crypto tax.

Whether you’re a seasoned crypto investor or new to the blockchain, our team is here to offer tailored guidance. We stay up-to-date with the latest tax regulations, ensuring that the advice you receive is not just accurate, but also relevant to the current crypto landscape.

Get in touch and join our community today.