Over the last few years, with the rise of Bitcoin and the like, there's been some doubt about the tax consequences of making and losing money by buying and selling cryptocurrencies. HMRC have published guidance about it now - and essentially it says what most accountants have been saying all along.
For almost all people, cryptocurrency profits and losses will be a Capital Gains Tax thing, not an Income Tax thing. That might be good or bad depending on your circumstances. It'd only be an Income Tax thing if you were considered to actually have a trade in buying and selling crypto, and that's going to be vanishingly rare.
Since it's a Capital Gains Tax thing, that means that buying and selling cryptocurrency will generate capital gains and losses as a result of each transaction, in the same way that buying and selling shares does, even if you choose to reinvest the proceeds in another cryptocurrency so haven't seen any real money hit your bank account.
Importantly, you can't just lump together all your cryptocurrencies or accounts/exchanges for the purpose of figuring out what the tax consequences are, it's on a transaction by transaction basis. So if you buy some Bitcoin, sell it to buy some Etherium, sell that to buy some Bitcoin again, and then sell some of that to buy some Litecoin, you've got three separate transactions to work out the gain or loss on. You can't aggregate all your Bitcoin trading for the year, or aggregate all the transactions in one account. If you accumulate a lot of transactions, you might want to look into third party software that can interrogate your accounts and figure it out - some people are trading through a bunch of different accounts, and a sale in one will more than likely need to be matched with a purchase in another for tax purposes.
Also, consider this. Someone buys £10,000-worth of Bitcoin early in the tax year. They exchange it for £40,000-worth of Litecoin halfway through the tax year. Litecoin later crashes and is worth little by the time the person's tax return is done after the end of the year. That person has a capital gain of £30,000 on which to pay Capital Gains Tax. The fact that they kept the money in crypto isn't relevant; there's a disposal for £40,000 of something that cost £10,000. They may now sell the Litecoin for next to nothing, and that will create a capital loss now - but you can't carry that back to set off against the previous year's profit. The point is, there will be a whole lot of people who don't realise that they've got a very complicated tax issue - because they've not "cashed out", they don't realise that something has happened to create a taxable transaction (or hundreds of them!). And there will be plenty of people who have made no money at all, but since they made some profits THEN some losses they might be sitting on a tax liability all the same...
Comments