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Do I have to pay capital gains tax if I sell bitcoin?

I invested £10,000 in bitcoin in late 2020 and despite its fall from the peak in November, I’ve still roughly trebled my money.

My initial £10,000 investment is now worth about £30,000 and I am thinking about selling half and investing into some investment trusts I have had my eye on, to take advantage of lower prices after recent market falls.

Do I have to pay capital gains tax if I sell £15,000 of bitcoin? I haven’t made any other gains this tax year. Via email.

HMRC considers cryptocurrencies to be assets because typically they are held as investments 

This is Money replies: Capital gains tax (CGT) is a tax on the profit you make when you sell an asset that has increased in value – in your case, bitcoin. 

The taxman has made it clear that crypto-assets are not considered a currency but an investment and so are liable for capital gains tax. 

You have to pay CGT when gains on an investment are above the annual allowance of £12,300.  

If your capital gains across all assets don’t breach the allowance, you still need to report your gains in your tax return if you’re registered for Self Assessment, and the total amount you sold the assets for was more than four times your allowance. 

In your instance, you are considering selling half your £30,000 bitcoin holding and so cashing in £15,000 worth. That is greater than the capital gains tax allowance, however, you only pay tax on the gain that you have made and so need to factor in what you paid for the bitcoin in the first place.  

If you bought all the bitcoin you plan to sell at the same time in 2020 and it has doubled in value, then the £15,000 you will cash in would have cost you about £7,500.

Your profit aka capital gain is thereofre £7,500 and falls within this year’s CGT allowance, so there is no tax to pay.

That annual allowance runs out in less than a month, when the tax year ends on 5 April and cannot be rolled over. 

If on the other hand you sold all your bitcoin in one go, then you would be realising a profit or capital gain of £15,000 and would owe tax on the £2,700 between the £12,300 CGT threshold and that. 

An expert explains capital gains tax in more detail below. 

James Carn, associate director of private client tax services at Tilney Smith & Williamson, repliesWhether you need to declare crypto-asset holdings to HMRC depends on the amount of any realised gains and losses, together with gains and losses realised in the tax year on any other assets. 

HMRC considers cryptocurrencies to be assets because typically they are held as investments, however speculative.

Profits realised on sales may be subject to CGT and losses could be available to offset against other capital gains. 

But even where crypto-assets are used as a currency to buy things, there is a disposal for tax purposes, which may contribute to a CGT liability.

In exceptional cases, an individual could be treated as carrying on a financial trade in crypto-assets and, if this is the case, any trading profits would be subject to income tax instead of capital gains tax.

The tests to determine whether or not an individual is deemed to be ‘trading’ in an asset are complex and are based on the interaction of a number of factors, including the source of financing, the frequency of transactions, the method of acquisition and the interval of time between the purchase and sale of the asset.

Trading losses can be offset against other income which is more attractive than the capital loss treatment. 

HMRC is, however, likely to challenge a taxpayer who reports a crypto-asset related loss as a trading loss because there is a high hurdle to clear in order to meet the trading criteria.

Calculating capital gains and losses

Carn explains: Individuals need to calculate their gain or loss when they dispose of their crypto-assets to find out whether they need to pay CGT. A ‘disposal’ includes:

– exchanging crypto-assets for sterling, another fiat currency, or for a different type of crypto-asset;

– using crypto-assets to pay for goods or services; and

– giving away crypto-assets to another person, in which case the proceeds received are deemed to be the market value of the holding in sterling.

CGT will not be due on transfers between spouses or civil partners or on most gifts to charity if the transfer is direct.

As well as the amount originally paid for the asset, other costs can be deducted when calculating the gain or loss, including transaction fees, valuation fees and specific other professional fees.

Costs for mining activities do not count toward allowable costs for CGT but it is possible to deduct some of these costs against trading profits for income tax. 

HMRC requires share pooling rules to be applied when calculating gains and losses realised on disposals of crypto-assets. 

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