To many, cryptoassets, which includes cryptocurrencies, are an enigma shrouded in mystery. Whether we are talking about Bitcoin, Dogecoin, Litecoin, blockchain or mining, most people will not have a clue.
But for those who have dabbled in the market, it’s important for them to understand that there may be tax liabilities with Capital Gains Tax and Income Tax, with any transactions whether with currency or other cryptoassets.
HM Revenue & Customs (HMRC) has been issuing nudge letters to taxpayers that it has identified as holding cryptoassets.
A ‘nudge’ letter is a standard letter sent to a large group of UK taxpayers.
The letter states that the taxman has information that indicates you hold, or have held, investments in cryptoassets.
It then invites recipients to determine whether they have made disposals of such assets in 2020/21 or earlier tax years in excess of the current CGT exempt amount of £12,300.
What is a "disposal"?
According to HMRC, you make a disposal of cryptoassets whenever you:
- Sell cryptoassets for currency (e.g.; British pounds or US dollars). Gains from these transactions are taxable, even if the money you make is not 'withdrawn' from the cryptoasset exchange.
- Exchange one cryptoasset for another, for example Bitcoin to Ether. You must pay CGT on these gains, even if you haven't converted your cryptoassets back to currency.
- Use cryptoassets to buy goods or services.
Do I have to pay CGT?
You must pay CGT if your total gains arising from all disposals in a tax year are over the annual exempt amount.
This allowance is not exclusive to cryptoassets, it also covers any disposal of other assets, such as shares, or property.
Your 'gain' is normally the difference between what you paid for an asset and what you sold it for, or what it was worth when you exchanged it, used it to buy goods or services, or gave it away.
Conversely, if you make a loss, you may be able to use this to reduce the CGT due on other gains.
Calculations can be complex – if your gains may exceed £12,300, you are advised to seek professional advice. For more information, go to www.gov.uk/guidance/check-if-you-need-to-pay-tax-when-you-sell-cryptoassets
The letter adds that you need to review your cryptoasset transactions. If you're satisfied that you do not have any tax to pay, you do not need to do anything.
If you've made gains that exceed your annual exempt amount, you need to inform HMRC.
If you want to claim a loss, you can either file a Self Assessment tax return, or write to HMRC within four years of the date that the loss was made.
For help and advice on related tax matters, contact our expert team today.