Tax on Cryptocurrency – The Basics
What is Cryptocurrency?
Cryptocurrencies are decentralised digital currencies which are distributed on a public ledger called the blockchain.
The biggest cryptocurrencies by market cap are Bitcoin and Ethereum.
Cryptocurrency has, to many individuals, become a form of investment. As such, HMRC treats them as assets. Therefore, HMRC have created new rules to tax the profit made by individuals.
What tax do I need to pay?
Capital Gains Tax is payable on your cryptocurrency profits. The rate of CGT is 10% for basic rate payers and 20% for higher rate tax payers. Each individual also receives a capital gains tax free allowance of £12,300 each tax year.
Its important to make use of your capital gains tax free allowance each year as these are often wasted.
Capital gains on crypto currency will be declared on your self assessment tax return and the payment will be due by 31 Jan following the end of the tax year.
How do I calculate my cryptocurrency gain or profit?
A gain/loss is made on a cryptocurrency on the following events:
• When you sell crypto currency for money
• Exchange one cryptocurrency for another
• Use cryptocurrency to buy goods or services – this includes non-fungible tokens
• Give away cryptocurrency to another person - not including your spouse of civil partner
The gain or loss on most investment assets is calculated by deducting the purchase price from the selling price. You may also deduct other allowable costs to reduce your gain such as transaction fees on purchase or sale.
The Pooling Concept
Similarly to gains made on selling shares in companies, HMRC have a ‘pooling’ concept which makes the calculation much more complicated.
The disposal of assets are matched to the purchase price in the following order:
- Purchases on made on the same day
- Purchases made in the next 30 days
- The remainder are put into a pool and aggregated
It is important to keep accurate and detailed records of which cryptocurrencies you own and when these were bought and sold so that the above calculation can be made.
If you have invested in cryptocurrency and need help calculating your gain/loss and tax, get in touch to find out how we can help today.