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How your crypto gains are taxed

HMRC wants a share of your cryptocurrency gains even if they've all disappeared by the time your tax is due
How your crypto gains are taxed

If it really is true that 1 in 10 people in the UK have exposure to cryptos, and if they have all dutifully been reporting their currency gains then come the end of January 2022, HMRC will be enjoying some sensational capital gains tax receipts. They’ve probably already got the champagne out in Parliament Street. 

Now, if you are a crypto investor sitting on substantial gains, and you’re thinking well I haven’t cashed in my holdings so this won’t affect me, you may need to start thinking fast about how you will fund a tax bill. Similarly, If you are Dogecoin holder nursing a hefty loss thanks to Elon Musk's comments at the weekend declaring it a hustle, don't assume you are off the hook for tax. If you've been trading in and out of this joke crypto, and "realised" gains along the way even if only in a digital sense, then depending on the size of those gains, you could be facing a large tax bill.

Any crypto transaction that locks in a gain is treated as a disposal for capital gains tax purposes. Selling your crypto assets for real rather than digital money is obviously a disposal but so is exchanging one type of coin for another, a common feature of crypto investing. In a rising market, every transaction you make is likely to crystallise gains even if you're not turning them into hard cash. However, cryptocurrency holdings that have been left alone, on the exchange or in a wallet, won't give rise to a tax bill until you make a disposal.

The bottom line is that you are required by HMRC to declare your taxable gains and payments on all types of crypto assets – including exchange, utility and security tokens, and stable coins. Note that HMRC is clamping down hard on exchanges to reveal information about their customers and if you are found to be evading tax, the penalties can be severe.

Almost all profits from crypto trading fall into the category of capital gains tax, not income tax which means your gains will be taxed at 20 per cent if you are a higher or additional rate taxpayer compared with up to 45 per cent (plus National Insurance) on income. It’s rare for an individual to be deemed a professional crypto trader. “It’s quite a high bar,” says Chris Etherington, crypto tax specialist and partner at accounting firm RSM.  But if you are, your gains will be taxed as income. You will also pay income tax on interest received on coins that you stake (to give exchanges liquidity) even if the interest is received in the form of other coins. Airdrops given as payment in return for services will also be taxed as income. And while it’s unlikely that there are many individual miners of any of the major coins in the UK given the computing power and expense of the energy required to power them, it is possible to mine newer coins and your returns from this activity will be taxed as income. You cannot hold crypto assets in an Isa.

So how do you work out your capital gains tax liability? This isn’t always easy particularly if you have been trading. It’s fairly common for investors to rack up many thousands and even millions of transactions, says Etherington, with each one counting as a disposal, particularly if you are using algorithms and trading programs to shift from one coin to the latest one going to the moon.

Your gains are the difference between the purchase price and the price at disposal. Normal share matching and bed and breakfasting and 30 day rules apply which means the difficulty of working out your CGT liability on share transactions pales in comparison with working out your crypto gains. But most exchanges will do the calculations for you (although you need to make sure you link to up all assets held elsewhere in wallets and other exchanges otherwise you could end up with an incorrect and higher liability). Software programs can make the job much easier too.

Otherwise all the usual CGT rules apply. You can use your annual £12,300 annual allowance to shelter some gains, and you can offset losses against gains elsewhere (read more about using crypto losses to reduce your tax bill here). If a crypto asset becomes worthless you can apply to HMRC to have this added to its negligible value list. 

But what investors really need to watch out for is the risk that their gains will have vanished by the time their tax bill is due. Because there can be a long gap between when you realise gains through a disposal and when you pay your tax bill, your crypto assets could have fallen so much you do not have the means to pay your tax bill. Etherington says investors should always be thinking about how they would pay a future whacking great tax liability, potentially making real withdrawals to do so. Your coins might be worthless by the time the January tax deadline comes around but you will still have to pay tax on gains that have vanished.