Once a niche technological experiment, investors worldwide are now paying full attention to cryptocurrency.

With its growing popularity, tax authorities are increasingly focusing on digital currencies like Bitcoin, Ethereum, and others.

How is Capital Gains Tax (CGT) applied to cryptocurrency?

In the UK, cryptocurrencies are treated as assets for CGT purposes.

This means that any profit made from selling, exchanging, or disposing of digital coins or tokens may be subject to CGT. Here are some common scenarios where CGT could be applicable:

• Selling cryptocurrencies for traditional currency (fiat money)
• Exchanging one type of cryptocurrency for another
• Using cryptocurrencies to purchase goods or services
• Gifting cryptocurrencies (gifts to a spouse or civil partner are exempt)

Although most crypto transactions fall within the scope of CGT, there are exceptional circumstances in which the profits made are liable to Income Tax if the individual’s crypto activity is such that they are considered to be carrying on a trading business.

Calculating your capital gains

To determine your capital gain or loss, you first need to establish the cost basis of your crypto asset, which includes the purchase price, transaction fees, and any other acquisition costs.

When you dispose of the cryptocurrency, subtract the cost basis from the disposal value to calculate your gain or loss.

If your total gains exceed the annual CGT allowance (set at £3,000 for the 2024-2025 tax year), you will need to report and pay CGT on the excess.

Where the net gain is within the allowance, no tax is due, but where the total proceeds from all disposals in the tax year exceeds £50,000, the disposals are required to be reported on the tax return.

Strategies for managing CGT on cryptocurrency

• Utilise your annual CGT exemption: This allowance cannot be carried forward, so make sure to use it each year.
• Offset losses: If you sell cryptocurrency at a loss, these losses can be offset against future gains, reducing your overall tax liability.
• Timing of disposals: Consider spreading the sale of assets across different tax years to maximise the use of your CGT allowance.
• Keep detailed records: Maintain comprehensive documentation of all your cryptocurrency transactions, including dates, amounts, and types of transactions. These records are essential for accurate tax reporting.

Crypto compliance

As the cryptocurrency market continues to mature, tax regulations surrounding digital assets are expected to evolve.

Staying informed about these changes is crucial for compliance and optimising your tax strategy.

Having expert advice is essential to navigating the complexities of crypto taxation, ensuring compliance, and maximising the benefits of your investments.

For personalised guidance on CGT and your crypto assets, feel free to reach out to us.