Cryptocurrencies are becoming more and more popular, no longer are people content with just buying bluechip shares as an investment. Investors are looking for new trends and fresh ideas to invest in. 
Enter Cryptocurrency!

Capital Gains &Amp; Cryptocurrency

What is Cryptocurrency? 

First, of all, I want to state that this is not advice, I’m not recommending you buy or sell any Crypto, I have no opinion on its safety, value or longevity! 

I’m just observing things from a tax perspective. 

Ok, disclaimer out of the way let’s go…

“Cryptocurrency is essentially a digital currency, a means of value exchange that uses cryptography as a means of security.”

There are better explanations out there that I can give! 

But think of crypto as a virtual currency. People are investing in different ‘coins’ as they think the value will increase, just like any other asset.

From a tax perspective, HMRC is getting hotter on digital currency. In their eyes anything that potentially yields a capital gain they want to know about!

Why are HMRC interested?

As I’m typing this many of the popular Cryptocurrency coins are at or near all-time highs, which means a lot of people are sitting on profits. HMRC don’t want to be missing out on any tax.

If cryptos were at lows and most people had lost money, I imagine the tax office would not be concerned.

Anyway, as I said, this is not a price prediction article, let’s stick to tax…

Taxes on Cryptocurrency gains

When it comes down to it, HMRC treats cryptocurrency like any other capital gain.

In other words, if you spent £1000 on a virtual currency and sold it for £5000 you have made a capital gain of £4000. Regardless of whether or not that’s a virtual currency, a bottle of wine or shares in a company…

It’s worth noting here that you could have an unrealised gain (eg your coins are worth more but you haven’t sold yet) in that situation you have not yet sold the asset and therefore have no capital gain. So there’s no need to worry about informing HMRC.

What happens when you sell?

Once you sell your coins if you have made a profit, you may be liable to pay capital gains depending on the magnitude of the profit.

The good news is that as an individual in the UK you get a capital gains tax free allowance of £12,500

What does that mean?

Each year this is how much capital gains you can make without paying tax.

So, if you’ve sold your Crypto investment and made less than that there’s no tax to pay.

However, if you’ve made more than that in gains, you’ll, unfortunately, have to pay some tax.

What tax will I pay?

How much tax you will pay depends on your tax rate and individual circumstances.

If you pay a higher rate of income tax you’ll pay 20% on your gains

If you are a basic rate taxpayer the calculation becomes a bit different:

First work out your taxable income (income – personal allowance)

Work out your taxable gains on the Crypto

Deduct your tax-free allowance from the gains

If that amount is within the basic income tax band (currently £50,270) you’ll pay 10% on your gains, anything above that you’ll pay 20%

Eg: You buy RJFcoin at £500, it naturally soars in value to £20,000 and you cash in. 

  • Your gain is £19,500
  • Your allowance is £12,500, therefore you have a taxable gain of £7,000
  • Your taxable income is £30,000
  • Add this to your taxable capital gain = £37,000
  • This is less than the higher rate of tax so you’ll pay 10% capital gains tax
  • Your tax bill on that £19,500 gain would be £700 (10% of £7,000)

In summary, any digital assets are treated the same way as physical assets by HMRC. (It’s also worth noting that giving away the coins or exchanging them still counts as selling in the eyes of HMRC.)

I hope that helps! If you need specific advice about your situation or guidance on reducing your tax liability then don’t hesitate to call us.

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