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Exchanging one cryptocurrency for another- when can an individual “roll over” this gain?

Exchanging one cryptocurrency for another- when can an individual “roll over” this gain?

Is it worth a £60,000 per year cost to be able to rollover taxable cryptocurrency gains when you move from one currency to another?

In our previous articles (click here), we have covered the tax treatment of UK resident individuals on their gains on cryptocurrencies. We’ve explained that in our view the majority of such individuals will be liable to capital gains tax, on the basis of HMRC’s approach as set out in their guidance and the CG Manual.

We pointed out the surprising result that when you convert from one cryptocurrency to another, this can give rise to a taxable gain, even though you have received no fiat cash. However, there is one group of individuals where this is not the case, and their cryptocurrency gains will become taxable only when cash is paid into a UK bank account or the proceeds are otherwise remitted to the UK. However, in some cases the individuals may need to pay up to £60,000 in each tax year to HMRC to achieve this result, so would need to have substantial gains. This treatment applies to individuals who are not treated as UK domiciled for tax purposes and who are taxed on the remittance basis.

“Domicile” is a complex concept but can be broadly explained as being the country which is your home. New legislation was introduced on 5th April 2017, which resulted in people who had lived in the UK for at least 15 of the preceding 20 tax years being treated as UK domiciled for tax purposes for the first time. However, there are still thousands of individuals who are UK tax resident but not UK tax domiciled. These individuals can claim the “remittance basis”, on paying a charge to HMRC of between £30,000 and £60,000 for a tax year, depending on how long they have been resident in the UK. If they have been resident for less than 7 out of 9 of the preceding tax years there is no charge to pay to be taxed on the remittance basis. The claim can be made after the end of the tax year, so you are able to calculate the cryptocurrency gains for the year before having to decide whether to claim for that year.

A non-UK domiciled individual who is taxed on the remittance basis may only be subject to UK tax on the gain on cryptocurrency when it is “remitted” to the UK. This is the case if the cryptocurrency being disposed of is considered to be situated outside the UK, and for this to be the case, it would need to be not subject to UK law at the time when it is created. Most cryptocurrencies are issued by non-UK companies with non-UK legal agreements.

This might be particularly significant where such an individual participates in an Initial Coin Offering (“ICO”). Often the subscription will be made in cryptocurrency. Without the remittance basis, there could be a taxable gain on the subscription for the ICO, which could mean that an individual’s investment has to be smaller.

The key questions are;

a) Are the benefits of being able to defer your tax liability while you continue to invest in cryptocurrencies worth paying HMRC up to £60,000 per year?
b) If they are, how do you establish whether you fall within these rules?

Even if you don’t fall within these rules, does your spouse? It may be possible to give your cryptocurrency to a non-UK domiciled spouse without a tax charge. Gifts between spouses do not give rise to a capital gains tax liability. However, gifts from a UK tax domiciled spouse to a non-UK tax domiciled spouse can give rise to an inheritance tax liability if they are worth more than £325,000, and if the spouse making the gift dies within 7 years.

Please contact us if you would like to discuss the taxation of cryptocurrencies.