Cashing Out Crypto Profits? Beware of the CGT trap as the tax authorities crack down on the bitcoin boom

Bitcoin rose above $89,000 for the first time as the cryptocurrency is buoyed by the effects of Donald Trump’s victory in the US elections and the resulting ‘Trump Trade’.

The stock was trading at $87,040 around noon on Tuesday after falling back from Monday’s record high.

The rest of the crypto market has also seen a boost, with coins like Cardano, Solana and Dogecoin also riding the rise.

With a large number of cryptos rising in value – and many speculators going into hodl (hold for life) mode in recent years – it’s likely that many are eager to cash out their winnings.

However, these investors may also be concerned about the tax they will have to pay if they cash out their holdings – or may not have thought about it at all, believing that crypto is ‘secret’ and therefore protected from the tax authorities.

James Carn of Evelyn Partners says: ‘The rising price of bitcoin will see many crypto investors in the UK take some profit – but how many will be aware that, under certain circumstances, they could have to sell to HMRC on a should indicate a specific moment? self-filing tax return?’

You are liable to pay capital gains on your crypto assets at different times, such as when you sell crypto for real currency, exchange one crypto for another, use crypto to pay for something or even if you give them away, including to a good cause.

Transfers to a spouse or registered partner are exempt from capital gains tax.

How do I calculate capital gains on crypto assets?

CGT applies in these circumstances where your net profit across all your invested assets exceeds your annual allowance.

This means you need to calculate your profit for each trade you make, usually the difference between what you paid for it, including transaction fees, and what you sold the asset for.

You must do this for each crypto disposal during the tax year to calculate your net gain or loss.

Any losses you make can be offset against your winnings.

Gains on your crypto assets must be calculated in British Pounds, rather than US dollars, and then converted.

At the most basic level, your CGT liability is affected by your annual salary.

According to the budget, taxpayers with a higher rate pay 24 percent on profits from assets, including investments. Additional rate taxpayers, i.e. those earning more than £125,140, ​​will also pay 24 per cent.

Meanwhile, basic rate taxpayers, those earning less than £50,271 a year, pay 18 per cent in capital gains.

This will be charged on your capital gains allowance of €3,000. If you own assets jointly with someone else, you can jointly double your profits without being charged any fees.

Generally speaking, most investors will use their £20,000 Isa allowance to protect their investments.

However, cryptocurrencies cannot be held in an Isa wrapper, meaning this option is not available to crypto investors.

How does HMRC track crypto ownership?

Some crypto holders may have recently received a ‘nudge’ letter from HMRC, advising you to check that you are not under-reporting your tax liability.

These letters are part of HMRC’s crackdown on tax evasion on crypto assets, with tax officials able to track crypto transactions through data sharing agreements and the international Crypto Asset Reporting Framework.

Crypto is by no means a hidden class of asset. Blockchains exist as public ledgers, where all transactions are recorded. However, this administration can be traced back to the asset holders themselves.

Crypto exchanges use users’ personal information to link their identities to their crypto transactions, allowing HMRC to track crypto holdings.

HMRC can request this information from stock exchanges, which the stock exchanges are legally required to provide.

Mr Carn says: ‘Crypto’s rapid appreciation coincides with a tighter tax environment for investors in Britain, so if holders of bitcoin and other digital currencies decide to cash in or take profits, they should beware of a potential tax liability , otherwise they have to beware of a possible tax liability. could be in conflict with HMRC.

‘HMRC has been closing in on crypto profits, estimating that there is a high rate of non-compliance, in terms of profits going undeclared.

‘The tax treatment of crypto assets can be complex. However, in simple terms, HMRC considers the profit or loss made on buying and selling exchange tokens to be within the scope of CGT.

‘The guidance says that HMRC will only accept in exceptional circumstances that buying and selling crypto would amount to a trade for tax purposes – and would therefore be included in income tax liabilities instead.’

Can a crypto wallet protect me from CGT?

The private nature of crypto wallets can lead investors to believe that their transactions will not be reported to HMRC.

This is not the case.

Crypto wallets are subject to the same data sharing agreements as crypto exchanges.

This means that information about your transactions, such as transferring your holdings to another cryptocurrency, will be shared with HMRC and you will have to pay tax on any winnings.

Again, despite private wallets being pseudonymous, which gives many crypto investors the illusion of anonymity, transaction history is public and visible to all.

Blockchain analysis can generally match transaction data with known addresses, giving HMRC access to personal information and transaction data, meaning they can track your profits.

Mr Carn added: ‘For individuals, the basic message is that if you sold crypto at a profit during the tax year, you may have to report this by filing a tax return and you may owe tax.

‘This is all the more relevant now that the CGT regime in Britain has become more restrictive.’

HMRC warns that failure to declare profits could lead to additional interest and penalties.