In the UK Capital Gains Tax (CGT) is payable on Bitcoin and any other cryptocurrency or cryptoasset.
Bitcoin, along with popular coins such as Ethereum, Litecoin, Bitcoin Cash and even ‘joke’ coins such as Doge, are effectively treated the same as shares by HMRC.
Most people who invest in cryptocurrency and add cryptoassets to their portfolios are hoping the price of the coin will rise.
As with other assets, if you then sell your cryptocurrency and your gains exceed your tax-free allowance (£12,300 – May 2021) you may need to pay CGT.
Once you exceed this allowance you’ll pay 20% on your gains as a higher rate taxpayer or 10% if you pay the basic rate. (Note: this varies for other assets, such as property).
When you might have to pay Capital Gains Tax
According to HMRC, there are several events which could trigger a CGT liability. They include:
- Selling your cryptoassets
- Exchanging one coin for another, ie Bitcoin to Ethereum
- Paying for goods or services with cryptocurrency
- Gifting tokens (unless to a spouse or civil partner)
In normal circumstances the calculation is simple. You deduct the amount you paid for the asset for the amount you sold it for to give you the gain.
How to reduce the amount of tax on my Bitcoin
There are certain things you can do to reduce the tax you pay on your cryptoassets.
For example, you can deduct certain costs to reduce your CGT liability, including transaction fees (paid to miners to process your transaction on the blockchain).
Advertising fees that you may have paid to find a buyer for your cryptoassets can also be deducted, along with any costs involved in drawing up a contract of sale.
When the ‘pooling’ rules apply to your cryptoassets
If you own more than one type of cryptocurrency, your tax calculation is made through process known as pooling. It also applies if you stagger your investments over a period of time.
The cost and number of coins you buy is grouped together and effectively averaged out to make the calculation simpler.
The formula is readily available online, but if you’re unsure you should get a tax professional to help.
Regular traders and the 30-day rule
Things are slightly more complicated if you’re a regular trader and buy and sell tokens of the same type within a 30-day period.
Then, what’s known as the 30-day rule applies in a similar way as it does when you trade and dispose of shares.
Using Bitcoin (BTC) as an example, if you buy BTC within 30 days of selling BTC the coins are not classed as pooled.
Sometimes two calculations are needed on the same cryptoasset to taken into account pooled and non-pooled holdings depending on your investment or trading activity.
Again, it’s best to seek the advice of an accountant to ensure your tax calculations are correct.
Adam is the founder of The Crypto Adviser which offers experts guides and reviews on all things related to Bitcoin and cryptocurrency.
Adam is Diploma for Financial Advisers (DipFA) Level 4 qualified, a Member of the London Institute of Banking and Finance (MLIBF), and has worked for many years as a journalist and PR consultant, having studied with the National Council for the Training of Journalists (NCTJ).