Taxation of Cryptocurrency: Detailed Q & A

1. Does moving a coin to & from a pen drive/stick (for security) make it liable for CGT?

– No, CGT arises only where there is a disposal, e.g. you sell it, give it away or trade it for another asset.

2. Is there a maximum time period for the pooling calculation?

– No, pooling begins from the point you acquire the first asset and only ends once all assets have been sold.

3. What should I know about large amounts of purchase & sale transactions?

– Computing gains manually is time consuming and expensive. We recommend using software such as https://koinly.io/ as a way of simplifying the process.

4. What are the rules for coins bought & sold on the same day? What are the rules for coins sold & repurchased within 30 days of selling?

– To understand the rule it’s worth explaining the tax avoidance HMRC are attempting to clamp down on here.

Imagine John buys crypto for £1 on 6th April 2019. In three year’s time, on 5th April 2022, it’s worth £36,901 (a gain of £36,300 – 3x the annual exemption). When he sells he’d have a taxable gain of £24,600 (£36,900 – £12,300 annual exemption) on which he’d pay 20% tax.

Imagine instead though John does some planning. Every year he sells his assets, then immediately buys them back to increase the base cost:

Transaction

Date

Purchase Price

Sale Price

Gain

Note

Purchase

05/04/2019

£                  1

Sale

05/04/2020

£ 12,301

 £     12,300

(£12,301 – 1)

Purchase

06/04/2020

£         12,301

Sale

05/04/2021

£ 24,601

 £     12,300

(£24,601 – £12,301)

Purchase

06/04/2021

£         24,601

Sale

05/04/2022

£ 36,901

 £     12,300

(£36,901 – £24,601)

By doing this John crystalises £12,300 of gains every year. As that’s not in excess of his annual exemption he pays no CGT. He does, however, increase the base cost of the assets. By doing this year on year, he never pays any tax.

HMRC felt this type of planning constituted avoidance. In their eyes, you haven’t really crystalised a gain if you immediately re-acquire the asset.

So what the rules say is that where you repurchase on the same day, or within 30, you match the sale and the reacquisition. If you sell for £12,301 and re-buy for £12,301 you haven’t made a gain. If you sell for £12,302 and buy back for £12,301 you’ve only made a £1 gain. If you sell for £12,301 and buy back for £12,302 you’ve made a £1 loss. The impact of the rules is, in effect, to defer the gain until such time as you, “genuinely” dispose of the crypto for good (for more than 30 days).

5. Is transferring specific crypto coins between your own crypto wallets & exchanges free of tax?

– Yes, provided you aren’t trading one crypto for another or converting to fiat currency. So transferring bitcoin from Coinbase to Binance would be fine. Selling bitcoin in Coinbase and investing the GBP in Binance would not be. Nor would trading bitcoin for Ethereum.

6. Is it true that no CGT is due if crypto coins are bought with GBP?

– Correct, CGT is due on disposal not acquisition. The gain is the difference between the purchase and sale price. CGT would be due though if you bought crypto coins with other crypto assets. For example, if I acquire Ethereum using Bitcoin that involves me disposing of Bitcoin and I therefore have to recompute my Bitcoin pool and recognise a gain/loss.

If you would like to find out more or have different questions you would like to ask about taxation of cryptocurrency, you can contact us by calling 01326 660022 or you can email tax@thepeloton.co.uk.