Crypto Currency Gains and Taxes.

What are the risks to your crypto currency gains? The volatility of exchange rates is the obvious one, but what about the taxman?

In reality, in all but a few rare cases your crypto currency gains, once realised, are subject to tax. If you are a serial trader, buying and selling regularly, these crypto currency profits will be subject to Income Tax, but in all other cases your gains will be subject to Capital Gains Tax.

Interest and Penalties

Although very few of us enjoy paying taxes, we can in general accept taxes are a consequence of making a profit. However, penalties and interest are not, and with tax-geared penalties being as high as 100% of the tax due, penalties and interest can significantly and unnecessarily eat into your gains.

With the self-assessment tax return filing deadline of 31 January still a recent memory, as a tax advisor, I do wonder how many crypto currency gains were not reported? And consequently, how many individuals are exposing themselves to totally unnecessary interest and penalty charges?

Bitcoin gains

For an individual, for tax purposes you only have a crypto currency gain when you realise it. This means cashing it in. It does not matter whether this is to reinvest it in something else, crypto or otherwise, or to bank it or spend it on the latest gadget.

So if you are sitting tight on your 2,000% Bitcoin profit and still holding the same bitcoins in which you originally invested, then the tax office has no entitlement to anything! Your risk of fluctuations in Bitcoin is very real, but as a long term player, you know that anyway!

However, if you have previously cashed in your crypto currency gain, or are thinking of doing so, you have realised, or are about to realise a crypto currency gain, and now the taxman is interested!

As an individual, you have an annual exemption for capital gains tax (£11,300 for the 2017/18 tax year), meaning that your first £11,300 of gains in the tax year are exempt from Capital Gains Tax. Any gains in excess of this are taxed at 10% if you are a basic rate tax payer or 20% if you are a higher rate tax payer.

Tax Planning

Some simple tax planning, such as the use of joint ownership, and transfers between husband and wife, could give access to two annual exemptions, allowing £22,600 of capital gains to be exempt from tax.

Given the annual exemption, it may be that you have no gain and therefore no tax to pay. However, there is still a requirement to disclose the transaction on your personal tax return where the proceeds are more than 4 times the annual exemption, £45,200 for 2017/18 ( 4 x £11,300).

Bitcoin losses

Given the volatility of crypto currency, it is important to consider the position if you make a loss. In this instance, any capital loss can be set off against other capital gains in the year, or carried forward to off-set against future capital gains. To ‘capture’ this loss, a capital gain calculation needs to be included in your self-assessment tax return.

What do you need to do?

Understand your position, speak to an advisor, minimise your tax, and don’t waste those hard fought gains on unnecessary penalties. The taxman hasn’t risked his money, so don’t give him more than his fair share!

As ever, if you want any further advice, please contact us.


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