Did you calculate the CGT on cryptocurrency transactions for your tax return correctly?
…and what happens if you didn’t? read more
HMRC in their capital gains manual have set out their views on how capital gains tax (CGT) should be computed on cryptocurrency, at CG12100 (here). These rules apply only where the individual is not trading in the cryptocurrency and is not otherwise liable to income tax on the transactions. The CGT exemption for foreign currency gains will not apply because HMRC say “cryptocurrencies are not recognised national currencies”, and the exemption is restricted to gains on currency in bank accounts. So, a capital gains tax calculation is likely to be needed.
There are some surprising results;
- Swapping one cryptocurrency for another generally gives rise to a tax liability if there is a profit
- Even if you haven’t made a dollar gain when exchanging crypto, forex movements may still result in a taxable gain as acquisition cost and proceeds must be converted to £ sterling
- There is a pooling treatment for holdings of the same currency, which effectively averages the price that currency was bought at when you calculate the gain.
- Failure to inform HMRC about gains on cryptocurrencies which you made before 5th April 2017 can give rise to harsh penalties; the deadline for doing so is 30th September 2018.
When is a holding of cryptocurrency subject to capital gains?
If a profit on cryptocurrency is subject to tax as a trading profit, then it is not also subject to capital gains. The question of what trading is, is a wide subject and not addressed in this article. However, as amateur day traders in stocks and shares are not treated by HMRC as trading, it seems likely that in many cases crypto transactions will be treated as resulting in capital gains or losses.
Cryptocurrency will be within capital gains tax if it is an “intangible asset”, which includes a bundle of rights arising under a contract. It seems likely that most cryptocurrencies will fall within this definition.
However, it may not apply to all forms of coins and tokens obtained in an Initial Coin Offering (“ICO”). Derivatives such as options and contracts for differences may also not fall within the capital gains tax rules in this way.
When do you crystallise a gain; moving between different types of cryptocurrency?
Generally, a gain will arise when proceeds are received in a “fiat” currency, (a “non-crypto” one), and if the proceeds are in a currency such as euro or dollars, this would need to be converted to sterling at the rate at that time. If one type of cryptocurrency is exchanged for another, the HMRC guidance says that this is regarded as a “barter” transaction. This means that one currency is treated as being disposed of at market value and the other currency is treated as being acquired at the same market value. In particular, this triggers a tax liability on the gain despite the owner not receiving a “fiat” currency such as sterling.
This would not be the case if the individual is not domiciled in the UK for tax purposes; we will consider this further in a future article.
When is a holding of cryptocurrency a “security” for capital gains tax purposes?
The capital gains tax legislation sets out specific rules, the pooling rules, which apply to “securities”. There has been debate about when cryptocurrencies are securities for regulatory purposes, but the tax definition is much wider. It applies to assets of a type which can be sold without identifying which particular asset is being sold, which includes shares, but also would generally apply to cryptocurrencies; a contract would be for the sale of a specified number of e.g. bitcoins.
Different types of cryptocurrency should not however be pooled.
How do you calculate the gains on a cryptocurrency pool?
You need to keep a cumulative total of the amounts invested in cryptocurrency, including both sterling and amounts invested via other “fiat” currencies, converted to sterling at the spot rate that day. Then for each disposal, you would calculate what percentage of your holding that represented and deduct that percentage of the cumulative cost from your proceeds. You would also deduct that cost from the cumulative cost total ready for the next calculation.
For individuals there are “bed and breakfasting” rules, which would identify an acquisition of shares with a disposal made in the 30 days previously; this acts to prevent individuals from crystallising a tax loss by disposing shortly before 5th April and then reacquiring.
The effect of this is that it averages the costs of your holding in determining what can be deducted from your proceeds. This may well be more advantageous than a “first in first out” policy would be, if you made your first purchases at lower prices. If you calculated the capital gains tax on cryptocurrency on your 2016/2017 tax return on a “first in first out” basis in error, you are still within the time limit to amend it onto a pooled basis to reduce your liability.
What happens to the pool on a “fork”?
The HMRC guidance also covers the tax treatment of “forks”, where a cryptocurrency splits. For example on 1st August 2017, each holder of a Bitcoin received in addition 1 Bitcoin Cash. You might expect that since you did not pay anything for the Bitcoin Cash, there’s nothing to deduct in calculating a gain on it. The HMRC Manual suggests that the pooled base cost in Bitcoin that you had at 30th July 2017 can be split between Bitcoin and Bitcoin Cash in the proportion that their market values had to each other on 1st August 2017.
Penalty regime unless tax is corrected by 30th September 2018
There is a tough penalty regime – Requirement to Correct – which applies to offshore assets, and for capital gains tax purposes, a holding of cryptocurrency is an offshore asset because it is not subject to UK law. So even if the individual is UK resident and makes the investment sitting at a laptop in the UK, if the platform is outside the UK, the cryptocurrency is an offshore asset.
This penalty regime applies where there has been a failure to notify; an individual who realised a capital gain in the tax year to 5th April 2017 and who has not received a tax return should have notified chargeability by 5th October 2017. If such an individual doesn’t correct their position by notifying HMRC of the gain by 30th September 2018, there is a potential exposure to penalties of up to 200% of the tax not corrected.
HMRC published their capital gains tax guidance in December 2017, so in theory tax returns for 2016/2017 which were submitted by 31st January 2018 should have been completed on the basis set out in the guidance. These returns can still be amended, and again this would need to be done by 30th September 2018 as otherwise there is a potential exposure to significant penalties.
If HMRC discover after the amendment period for 2016/17 ends on 31st January 2019 that cryptocurrency gains have been omitted from returns, for example because you did not realise that the conversion of one cryptocurrency into another crystallised a gain, then because your return was not in line with their published guidance, they are likely to be able to assess the tax anyway.
In this article, we’ve used “woolly” language, like “generally”, “may”, “could”. The HMRC guidance is written using this type of frustratingly vague language. The problem is that the tax law can only be applied to a particular situation, and as cryptocurrencies are such a fast-developing world, any definite language could be proved wrong by something new. To arrive at a definitive answer, you’ll need an adviser who will apply the tax legislation to your particular investments and situation.