- Capital gains tax (CGT) applies to bitcoin investments
- Tax liability occurs upon asset sale, not withdrawal to fiat
- Consultation with an accountant for tax advice is crucial
How does the IRS handle capital gains from Bitcoin investments?
Is the tax liability incurred upon asset sale or the return of the benefit to your fiat bank account?
Since making a small investment in Bitcoin during the peak of the previous bull market (2020), I have incurred investment losses for the majority of that period. I am once again in the black and am uncertain of my next steps regarding the sale.
Would tax be owed if I sold Bitcoin and retained the proceeds in my cryptocurrency account, or would it only be due when I withdraw physical currency?
Tax matters are complicated at the best of times, but the regulations surrounding cryptocurrencies can be even more perplexing, according to Angharad Carrick of This Is Money.
Bitcoin, which was created in 2009, is an example of a relatively new asset; consequently, the tax office has implemented several new regulations regarding it in recent years.
One of the modifications pertains to the inclusion of crypto assets in the purview of capital gains tax (CGT), an obligation incurred upon the sale of an asset experiencing appreciation in value.
Rather than the quantity of money received, the gain is subject to taxation. To avoid paying capital gains tax (CGT), one must ensure that all gains in a given year do not exceed the tax-free threshold, which is presently £3,000.
When you sell your cryptocurrency, exchange it for a different form of crypto “token,” or use it to pay for goods or services, you may be required to pay CGT.
It is possible that you could incur liability if you transfer your tokens to an individual other than your spouse or civil partner, except for donations to charitable organizations.
Since its peak in November 2021, the cryptocurrency market has been comparatively quiet, requiring little effort from the majority of investors to record gains.
Bitcoin has risen in value since January, at one point approaching $72,000, due to inflows into the newly introduced US spot Bitcoin ETFs.
Similar increases have been observed in the prices of other cryptocurrencies, and although they have since been moderated, crypto investors may be resting on substantial profits.
Should you retain these in your cryptocurrency account without transferring them to your traditional bank account, will you be subject to taxation?
We sought the counsel of James Carn, associate director in Private Client tax at Evelyn Partners, and Catherine Heinen, FCCA of TaxAssist Accountants.
According to FCCA Catherine Heinen, gains on crypto assets held for personal investment are typically subject to CGT. Events that are subject to taxation include the sale, exchange, gifting, or use of cryptoassets to purchase other cryptoassets or products and services.
The donation of tokens to charity is exempt from CGT.
If you sold Bitcoin without withdrawing the proceeds to your bank account, that would be considered a taxable event, and you would need to assess your CGT exposure.
Crypto assets, including bitcoin, are chargeable assets for capital gains tax. Consequently, any capital gain or loss is recognized for tax purposes upon selling or otherwise disposing of the asset, including charitable donations or purchases of goods and services denominated in Bitcoin. This information is provided by James Carn of Evelyn Partners.
The bitcoin is subject to taxation at the time of sale, not upon withdrawal of currency from a wallet. It is crucial to acknowledge that disposals do not exclusively involve conversions into fiat currencies, including Sterling.
Additionally, disposals take place when one cryptocurrency asset is exchanged for another cryptocurrency asset and capital gains cannot be carried forward to successor cryptocurrency investments.
Before reinvesting, a taxpayer who realizes a capital gain should reserve a portion of the proceeds to cover any capital gain-related tax liability.
Failure to comply with this requirement may result in the taxpayer being unable to pay the tax on the initial gain due to a depreciation of the replacement asset. Offsetting a capital loss against a capital gain is not feasible unless the loss is recognized in the same tax year as the gain.
The process of computing a capital gain or loss
Capital gains are computed by deducting allowable costs from the value at disposal, according to Heinen.
Allowable expenses consist of transaction fees, advertising expenditures, the cost of acquiring the asset, certain professional services, and expenses related to conducting an assessment or allocation to compute gains or losses. Expenses deducted from profits to account for income tax or cryptocurrency mining are not deductible for CGT purposes.
As it relates to the asset’s purchase price, HMRC employs a “pooling” system. Before matching disposals with purchases within the next 30 days, purchases are matched with disposals on the same day. Each token type subsequently enters its own “pool” and is assigned a unique “allowable cost per pool.”
In situations where capital losses have been incurred in prior years, they might qualify for credit against capital gains. There is an indefinite carryforward of losses that are reported to HMRC.
Although it is advisable to disclose losses in the year they transpire, HMRC allows an additional four years to do so. Failure to report and utilize losses remains a consequence beyond the four years.
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Losses that have not been reported could necessitate an adjustment to your tax return. If no tax return was required for those years, losses can be reported in writing to HMRC.
Although some loss alleviation may be available when the value of a cryptocurrency asset has decreased to “next to nothing,” it is not applicable when the asset is worth less than what you paid for it.
CGT is calculated by your total income and tax rate. Following the deduction of the annual exempt amount, the gain will be subject to taxation at one of the following rates:
The basic rate for taxpayers is 10%.
20% for higher and additional rate taxpayers
CGT is owed to HMRC by January 31st, after the conclusion of the assessment year. For instance, the tax on disposals completed between April 6, 2024, and April 5, 2025, must be paid to HMRC by January 31, 2026.
It is incumbent on you to maintain comprehensive records of all cryptocurrency transactions, encompassing the disposition date, type and quantity of tokens disposed of, quantity of tokens remaining, tokens’ value in pounds Sterling, and a log of the aggregated costs before and after disposals.
Due to the complexity of the CGT, it is critical to consult with an accountant.
