Check if you need to pay tax when you sell cryptoassets

Introduction

Discover if Capital Gains Tax is a consideration when you decide to sell or gift cryptoassets, such as popular options like cryptocurrency or bitcoin.

Capital Gains Tax may come into play when you part ways with cryptoasset exchange tokens, commonly known as cryptocurrency. It’s a tax that comes into play when your profits from selling specific assets exceed the tax-free allowance.

Also, be aware that receiving cryptoassets may potentially trigger other tax obligations. Stay informed to ensure you’re meeting your tax responsibilities

When should I check?

Capital Gains Tax might be on the horizon if you:

• Sell your tokens.
• Swap your tokens for a different type of cryptoasset.
• Utilise your tokens to make purchases or pay for services.
• Share your tokens with someone else (except as a gift to your spouse or civil partner).

Keep in mind that even if you donate tokens to a charitable cause, Capital Gains Tax considerations could still apply. Stay informed about your tax obligations in various token-related scenarios.

Work out if you need to pay

To determine whether Capital Gains Tax applies to your situation, it’s crucial to calculate your gain for each transaction you undertake. The method for calculating your gain differs if you sell tokens within 30 days of acquiring them.

Your gain is typically the discrepancy between what you initially paid for an asset and the amount you received when selling it. If the asset came to you at no cost, you’ll use its market value when computing your gain.

It’s important to note that you don’t have to pay Capital Gains Tax on tokens for which you’ve already settled Income Tax. However, any gains you accrue after acquiring them remain subject to Capital Gains Tax.

Additionally, you can factor in certain allowable expenses, including a portion of the combined cost of your tokens, when determining your gain.

Capital losses can also be applied to offset your gain, but you must report them to HMRC beforehand.

Remember, if your overall taxable gain exceeds the annual tax-free allowance, you must report and settle Capital Gains Tax accordingly.

What counts as an allowable cost

You have the option to subtract specific eligible expenses when calculating your gain, which encompass expenses such as:

• Transaction fees incurred before the transaction is incorporated into a blockchain.
• Advertising expenses associated with finding a buyer or seller.
• Costs associated with drafting a transaction contract.
• Expenses related to valuation, aiding in determining your gain for that particular transaction.
• Additionally, you can deduct a portion of the combined cost of your tokens.

However, please note that certain costs cannot be deducted, including:

• Costs that you’ve previously used to offset profits for Income Tax purposes.
• Expenses related to mining activities, such as equipment or electricity.

Pool the cost of your tokens

Organising your tokens is crucial, and you should group each type of token you own into pools, much like how you combine costs for shares. This helps in determining a pooled cost for each token type.

When you decide to sell tokens from a pool, you can deduct a proportionate share of the pooled cost, in addition to any other allowable costs, to reduce your gain.

However, it’s important to note that calculating the pooled cost differs if there has been a hard fork in the blockchain. Therefore, recalculating the pooled cost is necessary each time you buy or sell tokens.

When you make token purchases, simply add the amount you paid for them to the relevant pool. Conversely, when you sell tokens, subtract an equivalent portion of the pooled cost from the respective pool.

Detailed record-keeping for each pool is a must to maintain transparency and compliance.

But wait, there’s an exception! If you buy and sell tokens of the same type – you don’t need to group them into pools if you buy them either:

• On the same day that you sell tokens of the same type.
• Within 30 days of selling tokens of the same type.

In such cases, the rules for calculating the cost are akin to those applicable to shares.

How to report and pay

If you find yourself in the position of needing to report and settle Capital Gains Tax, you have a couple of options:

• You can opt to complete a Self Assessment tax return at the conclusion of the tax year.
• Alternatively, you may use the Capital Gains Tax real-time service to promptly report your tax liability.

It’s worth noting that the tax amount may vary if you are not a UK resident.

When completing a tax return, ensure that all figures are recorded in pound sterling, as this is the standard currency for such declarations.

Records you must keep

It’s essential to maintain distinct records for every transaction, including:

• The type of tokens involved.
• The date when the tokens were disposed of.
• The quantity of tokens you’ve sold or transferred.
• The remaining number of tokens in your possession.
• The value of the tokens, denominated in pound sterling.
• Documentation of bank statements and wallet addresses.
• A record of the pooled costs both before and after disposing of tokens.

You might also find it beneficial to retain additional records like wallet addresses for a comprehensive overview of your crypto activities.

Remember, HMRC may request access to your records in the event of a compliance check, so keeping well-organised records is essential for smooth tax compliance.