At a glance

  • Cryptocurrencies such as Bitcoin and Ethereum are soaring in popularity – and value – again
  • However, a lot of investors haven’t been tax planning effectively, and could end up having their profits dented by a nasty Capital Gains Tax (CGT) surprise
  • CGT can get very complicated – especially where cryptocurrencies are concerned – so seeking expert advice is a great way to assess the best tax-saving options

At a glance

  • Cryptocurrencies such as Bitcoin and Ethereum are soaring in popularity – and value – again
  • However, a lot of investors haven’t been tax planning effectively, and could end up having their profits dented by a nasty Capital Gains Tax (CGT) surprise
  • CGT can get very complicated – especially where cryptocurrencies are concerned – so seeking expert advice is a great way to assess the best tax-saving options

At a glance

  • Cryptocurrencies such as Bitcoin and Ethereum are soaring in popularity – and value – again
  • However, a lot of investors haven’t been tax planning effectively, and could end up having their profits dented by a nasty Capital Gains Tax (CGT) surprise
  • CGT can get very complicated – especially where cryptocurrencies are concerned – so seeking expert advice is a great way to assess the best tax-saving options

Cryptocurrencies such as Bitcoin and Ethereum have been hitting the headlines again, owing to the recent huge surge in their value. ‘Digital currencies’ have been around since 2009 but have had a mixed reputation among professional investors because of the extreme volatility of their value.

However, in the first two months of 2021, the most popular and best-known cryptocurrency, Bitcoin, increased in value by a whopping 70%, reaching its highest level yet. This growth was fuelled by many things, not least the revelation that Tesla, the electric-vehicle manufacturer founded by Elon Musk, invested $1.5 billion of its spare cash into the currency. In fact, such investments are now beginning to gain a certain respectability in some quarters, with the likes of BlackRock, the world’s largest asset-management company, admitting that it has “started to dabble” in cryptocurrencies1.

Because of the massive increases, lots of people who have invested in cryptocurrencies recently – without thinking about tax planning – are likely to experience a shock that could land them with a large Capital Gains Tax bill. So, if you’ve been tempted to join the crypto gold rush, or are considering it, here are five things you should know about what it could mean for your tax situation.

1. Like all assets, cryptocurrencies are liable for Capital Gains Tax

HM Revenue & Customs (HMRC) makes it clear that cryptocurrencies are treated, for tax purposes, like most other assets, such as stocks and shares or valuable items. Therefore, if you own cryptocurrency assets, then ‘dispose of’ them, you may need to pay Capital Gains Tax on any profits you make. In this context, ‘dispose of’ means sell for regular currency; exchange for another kind of cryptocurrency (for example, Bitcoin for Ethereum); use as payment for goods or services; or give away to another person (who isn’t your spouse or civil partner).

Simply put, the profit you make is the difference between the price you paid for your cryptocurrency and the price at which you disposed of it.

Under 20-2021 tax rules, the current CGT annual exemption is £12,300. It means that, if your profit is less than this, you won’t have to pay anything. The same is true if you simply hold on to your assets. But if your profit is above this limit, you will be liable for CGT and will have to declare it on your annual tax return. The 2020-21 tax rates are 20% on everything above the £12,300 limit if you pay higher-rate income tax, and 10% if you pay the basic rate.

2. CGT can get complicated – especially for cryptocurrencies

As with most things related to tax, it’s rarely simple. One thing that can immediately muddy the waters is ‘pooling’. This occurs when you might have, for example, bought several Bitcoins at various prices at different points in time, then decide to sell just one of them. How is it decided what price that Bitcoin was bought at? HMRC asks you to ‘pool’ your assets or, in other words, create an average price of all the Bitcoins you bought over time – which is not always a straightforward calculation.

Then the maths gets even harder if you have losses that you can offset against your gains, reasonable expenses that you can claim against your profits, have exchanged one kind of cryptocurrency for another, or received your crypto assets without paying for them (for example, as a gift, as a payment or by ‘mining’ them yourself). On top of this, you must also keep clear and accurate records of every transaction you make, in case HMRC wants to take a closer look.

One more point to note: if you’re regularly trading cryptocurrency, it could be considered a business activity, and therefore the proceeds would become liable for income tax instead of CGT.

3. It gets even more complicated if you have other taxable gains, too

Further complexities can arise if you dispose of other assets that are liable for CGT, such as stocks and shares that aren’t in a capital gains tax-free wrapper such as a pension or ISA, or valuable items such as jewellery or antiques. All of the profits and losses for these must be added together to form your final tax calculation.

4. There’s a high risk of getting caught if you don’t own up to your CGT liabilities

You may think that if you own some cryptocurrency, you might be able to hide your profits from the tax inspectors – but that’s extremely unlikely. The surge in popularity of these assets, and the high profits many investors have made recently, means HMRC is paying close attention. For example, in October 2020, it demanded that the cryptocurrency-trading platform Coinbase hand over customers’ data to help with investigations into investors who’d potentially been avoiding tax bills.

5. Getting advice can be a great way to assess the best tax-saving options

Because of the complications of CGT tax rules, and the particularly complex nature of cryptocurrencies, it’s always worth seeking expert tax advice on this and your other investments. As well as giving you the peace of mind that comes with knowing you’re staying on the right side of the law – and that you won’t be liable for a hefty fine – expert advisers can talk you through the best tax-saving options, as it’s often easy to end up paying too much as well as too little.

What’s more, it’s highly likely that CGT rates will increase, along with a lot of other taxes, either in the next tax year or soon afterwards. An expert adviser will be able to help you to plan ahead and ensure you hold on to as much of your profit as possible.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Cryptocurrencies such as Bitcoin and Ethereum have been hitting the headlines again, owing to the recent huge surge in their value. ‘Digital currencies’ have been around since 2009 but have had a mixed reputation among professional investors because of the extreme volatility of their value.

However, in the first two months of 2021, the most popular and best-known cryptocurrency, Bitcoin, increased in value by a whopping 70%, reaching its highest level yet. This growth was fuelled by many things, not least the revelation that Tesla, the electric-vehicle manufacturer founded by Elon Musk, invested $1.5 billion of its spare cash into the currency. In fact, such investments are now beginning to gain a certain respectability in some quarters, with the likes of BlackRock, the world’s largest asset-management company, admitting that it has “started to dabble” in cryptocurrencies1.

Because of the massive increases, lots of people who have invested in cryptocurrencies recently – without thinking about tax planning – are likely to experience a shock that could land them with a large Capital Gains Tax bill. So, if you’ve been tempted to join the crypto gold rush, or are considering it, here are five things you should know about what it could mean for your tax situation.

1. Like all assets, cryptocurrencies are liable for Capital Gains Tax

HM Revenue & Customs (HMRC) makes it clear that cryptocurrencies are treated, for tax purposes, like most other assets, such as stocks and shares or valuable items. Therefore, if you own cryptocurrency assets, then ‘dispose of’ them, you may need to pay Capital Gains Tax on any profits you make. In this context, ‘dispose of’ means sell for regular currency; exchange for another kind of cryptocurrency (for example, Bitcoin for Ethereum); use as payment for goods or services; or give away to another person (who isn’t your spouse or civil partner).

Simply put, the profit you make is the difference between the price you paid for your cryptocurrency and the price at which you disposed of it.

Under 20-2021 tax rules, the current CGT annual exemption is £12,300. It means that, if your profit is less than this, you won’t have to pay anything. The same is true if you simply hold on to your assets. But if your profit is above this limit, you will be liable for CGT and will have to declare it on your annual tax return. The 2020-21 tax rates are 20% on everything above the £12,300 limit if you pay higher-rate income tax, and 10% if you pay the basic rate.

2. CGT can get complicated – especially for cryptocurrencies

As with most things related to tax, it’s rarely simple. One thing that can immediately muddy the waters is ‘pooling’. This occurs when you might have, for example, bought several Bitcoins at various prices at different points in time, then decide to sell just one of them. How is it decided what price that Bitcoin was bought at? HMRC asks you to ‘pool’ your assets or, in other words, create an average price of all the Bitcoins you bought over time – which is not always a straightforward calculation.

Then the maths gets even harder if you have losses that you can offset against your gains, reasonable expenses that you can claim against your profits, have exchanged one kind of cryptocurrency for another, or received your crypto assets without paying for them (for example, as a gift, as a payment or by ‘mining’ them yourself). On top of this, you must also keep clear and accurate records of every transaction you make, in case HMRC wants to take a closer look.

One more point to note: if you’re regularly trading cryptocurrency, it could be considered a business activity, and therefore the proceeds would become liable for income tax instead of CGT.

3. It gets even more complicated if you have other taxable gains, too

Further complexities can arise if you dispose of other assets that are liable for CGT, such as stocks and shares that aren’t in a capital gains tax-free wrapper such as a pension or ISA, or valuable items such as jewellery or antiques. All of the profits and losses for these must be added together to form your final tax calculation.

4. There’s a high risk of getting caught if you don’t own up to your CGT liabilities

You may think that if you own some cryptocurrency, you might be able to hide your profits from the tax inspectors – but that’s extremely unlikely. The surge in popularity of these assets, and the high profits many investors have made recently, means HMRC is paying close attention. For example, in October 2020, it demanded that the cryptocurrency-trading platform Coinbase hand over customers’ data to help with investigations into investors who’d potentially been avoiding tax bills.

5. Getting advice can be a great way to assess the best tax-saving options

Because of the complications of CGT tax rules, and the particularly complex nature of cryptocurrencies, it’s always worth seeking expert tax advice on this and your other investments. As well as giving you the peace of mind that comes with knowing you’re staying on the right side of the law – and that you won’t be liable for a hefty fine – expert advisers can talk you through the best tax-saving options, as it’s often easy to end up paying too much as well as too little.

What’s more, it’s highly likely that CGT rates will increase, along with a lot of other taxes, either in the next tax year or soon afterwards. An expert adviser will be able to help you to plan ahead and ensure you hold on to as much of your profit as possible.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Cryptocurrencies such as Bitcoin and Ethereum have been hitting the headlines again, owing to the recent huge surge in their value. ‘Digital currencies’ have been around since 2009 but have had a mixed reputation among professional investors because of the extreme volatility of their value.

However, in the first two months of 2021, the most popular and best-known cryptocurrency, Bitcoin, increased in value by a whopping 70%, reaching its highest level yet. This growth was fuelled by many things, not least the revelation that Tesla, the electric-vehicle manufacturer founded by Elon Musk, invested $1.5 billion of its spare cash into the currency. In fact, such investments are now beginning to gain a certain respectability in some quarters, with the likes of BlackRock, the world’s largest asset-management company, admitting that it has “started to dabble” in cryptocurrencies1.

Because of the massive increases, lots of people who have invested in cryptocurrencies recently – without thinking about tax planning – are likely to experience a shock that could land them with a large Capital Gains Tax bill. So, if you’ve been tempted to join the crypto gold rush, or are considering it, here are five things you should know about what it could mean for your tax situation.

1. Like all assets, cryptocurrencies are liable for Capital Gains Tax

HM Revenue & Customs (HMRC) makes it clear that cryptocurrencies are treated, for tax purposes, like most other assets, such as stocks and shares or valuable items. Therefore, if you own cryptocurrency assets, then ‘dispose of’ them, you may need to pay Capital Gains Tax on any profits you make. In this context, ‘dispose of’ means sell for regular currency; exchange for another kind of cryptocurrency (for example, Bitcoin for Ethereum); use as payment for goods or services; or give away to another person (who isn’t your spouse or civil partner).

Simply put, the profit you make is the difference between the price you paid for your cryptocurrency and the price at which you disposed of it.

Under 20-2021 tax rules, the current CGT annual exemption is £12,300. It means that, if your profit is less than this, you won’t have to pay anything. The same is true if you simply hold on to your assets. But if your profit is above this limit, you will be liable for CGT and will have to declare it on your annual tax return. The 2020-21 tax rates are 20% on everything above the £12,300 limit if you pay higher-rate income tax, and 10% if you pay the basic rate.

2. CGT can get complicated – especially for cryptocurrencies

As with most things related to tax, it’s rarely simple. One thing that can immediately muddy the waters is ‘pooling’. This occurs when you might have, for example, bought several Bitcoins at various prices at different points in time, then decide to sell just one of them. How is it decided what price that Bitcoin was bought at? HMRC asks you to ‘pool’ your assets or, in other words, create an average price of all the Bitcoins you bought over time – which is not always a straightforward calculation.

Then the maths gets even harder if you have losses that you can offset against your gains, reasonable expenses that you can claim against your profits, have exchanged one kind of cryptocurrency for another, or received your crypto assets without paying for them (for example, as a gift, as a payment or by ‘mining’ them yourself). On top of this, you must also keep clear and accurate records of every transaction you make, in case HMRC wants to take a closer look.

One more point to note: if you’re regularly trading cryptocurrency, it could be considered a business activity, and therefore the proceeds would become liable for income tax instead of CGT.

3. It gets even more complicated if you have other taxable gains, too

Further complexities can arise if you dispose of other assets that are liable for CGT, such as stocks and shares that aren’t in a capital gains tax-free wrapper such as a pension or ISA, or valuable items such as jewellery or antiques. All of the profits and losses for these must be added together to form your final tax calculation.

4. There’s a high risk of getting caught if you don’t own up to your CGT liabilities

You may think that if you own some cryptocurrency, you might be able to hide your profits from the tax inspectors – but that’s extremely unlikely. The surge in popularity of these assets, and the high profits many investors have made recently, means HMRC is paying close attention. For example, in October 2020, it demanded that the cryptocurrency-trading platform Coinbase hand over customers’ data to help with investigations into investors who’d potentially been avoiding tax bills.

5. Getting advice can be a great way to assess the best tax-saving options

Because of the complications of CGT tax rules, and the particularly complex nature of cryptocurrencies, it’s always worth seeking expert tax advice on this and your other investments. As well as giving you the peace of mind that comes with knowing you’re staying on the right side of the law – and that you won’t be liable for a hefty fine – expert advisers can talk you through the best tax-saving options, as it’s often easy to end up paying too much as well as too little.

What’s more, it’s highly likely that CGT rates will increase, along with a lot of other taxes, either in the next tax year or soon afterwards. An expert adviser will be able to help you to plan ahead and ensure you hold on to as much of your profit as possible.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

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