HMRC – Caution biting dog!
HMRC is the UK’s governing body when it comes to Taxation, to paraphrase a quote from HMRC; we collect the money that pays for the UK’s public services and help families and individuals with targeted financial support.
As Bitcoin and other crypto assets have grown in popularity over the years, so has the amount of people making money by investing or trading in them. While the UK is relatively friendly towards its citizens having access to these assets, HMRC does not want to miss out on it’s cut. Under HMRC rules, taxpayers who do not disclose gains could face a 20% capital gains tax plus any interest and penalties of up to 200% of any taxes due. In extreme cases, those found to have evaded paying tax could face time in prison.
During October 2020, we saw one of the most aggressive moves by HMRC to date in relation to policing Crypto assets, by using Schedule 23 of the 2011 Finance act; legislating custodial exchange Coinbase to provide information on all users from the UK whose wallets have received more than £5,000 in the 2019-2020 Tax Year.
It’s important to note, that so far, it appears Coinbase is the only exchange to have been required to supply this information to HMRC on behalf of their customers. If you have transacted in Crypto assets outside of Coinbase they may not have been reported to HMRC. I.e, if you have bought Bitcoin directly Via your Binance account this doesn’t appear to have been reported to HMRC.
In this section, with the help of the crypto tax professionals of Accointing.com, the best tracking- and taxation platform on the market, we dive deeper into the functioning of taxation in different crypto asset situations.
How much Capital Gains Tax will I have to pay on my Crypto?
This depends on two different things: your income tax bracket and how large your gain is.
- Firstly, some good news – You only have to pay capital gains tax on your overall gain, above the tax-free allowance of £12,300 (at the time of writing that is 0.5 Bitcoin.)
- If you’re a higher or additional rate taxpayer, your capital gain in excess of £12,300 will be charged at 20%.
- If you’re a basic rate tax payer, it’s a little more tricky. Your tax rate will depend on your taxable income and the size of the gain (after any allowances are deducted). An example of this is detailed below.
As we can see on the example to the left, If you’re a basic rate taxpayer and your taxable income, plus your capital gain less annual exemption equals or is less than £37,500 you will only pay 10% Capital Gains Tax. If the value exceeds £37,500 you should pay 20% on your capital gain that exceeds £37,500.
Now, unless you bought 1 Bitcoin or equivalent crypto asset, moved it to your secure wallet and then never engaged in another transaction until the day you disposed of the asset, it’s unlikely to be that simple to work out your capital gains tax due.
A UK specialty – Share Pooling
The sales price of a disposal is easy to find out but if you’ve purchased more than one (or many different assets) of the same asset, it can be much more difficult to work out your purchase price, and you may require an accounting professional to assist you. The way this is calculated is through share pooling. The idea of share pooling is to average out the cost of all asset acquisitions made that you currently own.
Example of a share pool:
- On the 1st of January Sarah Buys 1 Bitcoin at £2000.
- On the 1st of February Sarah Buys 1 Bitcoin at £3000.
- On the 1st of March Sarah Buys 1 Bitcoin at £4000.
- At this point in time Sarah has a pool of 3 Bitcoin, with an average acquisition cost of £3000 each.
- On the 10th of April Sarah disposes of 1 Bitcoin for £5000.
Sarah’s capital gain would be £2000.
If Sarah had bought 1 Ethereum and 1 Litecoin as well on each of those dates above, a separate pool would be created for those digital assets. Thus, you put each asset in its own pool.
Further to the share pool shown above, there are two further rules you need to be mindful of. These are the same day rule and the 30-day rule (also known as the bed & breakfast rule.) Neither of these rules apply to Sarah, however, if you’re a regular trader of Assets these will likely apply to you.
The idea behind these rules are to prevent wash sales, which is where an asset holder disposes of an asset that has decreased in value and then buys it back soon after. These sorts of disposals were highly lucrative to investors as it was a loophole to reduce their tax bill. The same day rule and the 30-day rule were introduced in 1998 to outlaw this type of evasive behaviour.
Let’s tackle the same day rule first:
If you sell a cryptocurrency and buy another crypto asset of the same type on the same day, the cost basis for your sale will be the acquisition cost of the crypto you bought on the same day. This will be the case even if the acquisition of the crypto takes place before the sale—as long as they are both on the same day.
The 30-day rule is exactly the same concept, any of the crypto you acquire within 30 days of a sale will be used as its cost basis.
How do these rules work when calculating capital gains?
The matching rules mean that when a disposal is made, assets sold are matched with other assets acquired in the following order:
- Crypto Assets acquired on the same day as disposal (the ‘same day rule’)
- Crypto Assets acquired in the 30 days following the day of disposal
- all other Crypto Assets on an average cost basis using the Share Pool
Harry bought 50 Ethereum for £500 in 2016. The current value of his holding is now £25,000. Harry is Keen to use his Tax free exemption this year.
- The Market Value of each Eth is £500
- The Cost of each Eth is £10
- Capital Gain per Eth is £490
- Harry sells 25.1 Eth on the 21st March 2020. (£490×25.1 Eth) which fully uses his Capital Gains allowance for the Tax Year.
(Note: At this point Harry has successfully used his Capital Gains Allowance for the Year and has no tax payable on his disposals… However, Now Harry cannot buy Eth for another 30 days if he wants to retain the Capital gains allowance.)
What Happens if Harry buys back into Eth within 30 days?
A week later, Harry decides to repurchase the 25.1 Eth, however in the meantime Eth has risen by £10. The price per Eth is now £510.
As a result of buying Eth within the 30-day period, Harry will need to re-calculate the capital gain on the disposal. Instead of using the price on the original date of sale, the Eth are matched with the Newly purchased Eth.
Disposal Proceeds 25.1 Eth x £500 (March 24th) £12,550
Cost 25.1 Eth x £510 (March 31st) £12,801
As a consequence of buying back into Eth within the 30-day period of sale, Harry hasn’t crystallized the gain as expected. This means he no longer used his Capital Gains allowance but instead created a £251 loss.
All these rules and regulations can be tiring. In a hectic everyday life, many people do not want to deal with their taxes. That is fully understandable! There is a solution on the market that will make things easier for you: Accointing.com. It is the best crypto-tracking and tax platform on the market. You can easily create tax reports that can be used directly for your tax return. Besides the USA, Germany and other countries, the tool also supports tax reports for the UK.
This article is for informational purposes only and should not be taken as tax or investment advice. If you’re unsure about how much tax you’re due to pay, you should check with a tax consultant or accountant.