Do I have to pay tax on my bitcoin gains?
Cryptocurrencies, particularly Bitcoin, have been in the press a great deal lately as their value soared throughout 2017. Experts are divided over whether this is a successful long-term investment or whether they will go bust in a similar way to the dot.com boom.
What is not open to opinion though is how any gains made on trading in them are taxed – you will be subject to capital gains tax on any realised gains and need to report them on your self-assessment tax return. If you have not sold or disposed of them, then the gain is not realised and you do not have to pay tax on it.
In the UK, the tax year runs from 6th April one year to 5th April the following year and any realised gains you make in that year need to be reported on the relevant return. The current tax year is 17/18, running from 6th April 2017 to 5th April 2018, due for filing and payment with HMRC by 31st January 2019.
Any gains you have made on the disposal of capital assets – second properties, shares, cryptocurrencies, etc – during that time need to reported on your tax return and are subject to capital gains tax.
You will be taxed on the profit – what you received less what you originally paid – less the annual allowance for capital gains. In the 17/18 tax year the allowance is £11,300.
For example, say you bought 100 bitcoins for £100 each two years ago so a total of £10,000, and in the 17/18 year you sold them for £50,000. That gives you a profit of £40,000 and after the allowance has been deducted it gives you a chargeable gain of £28,700.
Rate of tax
The rate of capital gains tax you pay on the cryptocurrency gain depends on the rate of income tax that you pay.
If you pay at the higher rate – earning over £45,000 and paying income tax at 40% then you will pay 20% capital gains tax on the chargeable gain, £5,740 in the example above.
If you pay tax at the basic rate – earning up to £45,000 and paying income tax at 20% – then it’s a bit more complicated, and depends on the size of the gain and your other income.
You need to add your taxable income (after personal allowance and any other reliefs) to your chargeable capital gain (after deducting your annual allowance) to come up with a total figure. If this total is within the basic income tax band (up to £45k currently) then you’ll pay 10% on your currency gain, but you’ll pay 20% if it is above this.
How can I avoid it?
Put simply, you can’t. But you can limit your tax bill by being clever.
The capital gains allowance is annual, so if you dispose of all your holdings in one year then you will only be able to use one annual allowance and pay higher tax. However, if you dispose of your cryptocurrency over several years, spreading the gain over those years, then you can take advantage of each year’s allowance to reduce your liability. If your total annual capital gain is under the annual allowance then there is no capital gains tax to pay at all.
It will also be more tax efficient to dispose of your cryptocurrency in the years that you know your income will be below £45k, therefore paying at the 10% rate rather than the 20%.
The above applies to people who have bought and sold the cryptocurrencies to make capital gains, but if you have ‘mined’ them – the system whereby computer users calculate complex algorithms required to verify each transaction in the blockchain and be rewarded with currency – then this is treated differently.
HMRC regard that as a trade, not a capital gain, so you would be subject to income tax and national insurance on the profits arising from them. All your income you made from mining, less all your expenses incurred as a direct result of mining gives you your profit. This will go on your self-assessment tax return as well as any capital gain, albeit in a different section and under different tax treatment.
The small print – do not ignore it!
It is important to note that you do not have to have received the physical cash from a capital gain for it to be chargeable. So, if you used the funds from the sale of your bitcoins to immediately buy another cryptocurrency or buy a property, you have still made a gain and need to declare and pay on it.
Just because cryptocurrencies are not regulated does not mean they are not taxable. When large amounts of money start being deposited in bank accounts by sellers, both the banks and HMRC will start to ask questions, so do not think you can get away with not paying what you owe. Read our article on tax evasion if you are not sure what that is.
Please be aware that this article is written under the basis of UK tax law and the basis that you are liable to UK tax. Tax systems in other parts of the world may operate differently, and those UK citizens based outside the UK may be subject to different tax laws.
If in doubt about capital gains tax – or any other tax for that matter- then get in touch with us on the details above.