Crypto winners can’t dodge the tax authorities

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If someone tells you that crypto doesn’t matter to the average investor, think again. Up to one in three customers now own crypto assets such as bitcoin. And the Financial Conduct Authority put the total number of crypto holders in the UK at no less than 2.3 million.

Most of my clients have a stake that is only worth a few hundred pounds. But I have at least one crypto millionaire – or at least he was a few weeks ago. These so-called currencies are so volatile that his holdings may have halved since our last conversation. Between mid-April and mid-July of last year, bitcoin fell 50% before doubling over the next three months.

In the past, I would ask clients when we first met what savings and investments they had. Now I have to ask a specific question about cryptocurrencies. This is because most people don’t seem to think of them as investments. So what are they?

This question is important, in particular because it governs their treatment in tax matters. There is a common perception that profits from the use of crypto assets are not taxable. This is not the case. HM Revenue & Customs has quite a manual on the subject.

Some people try to argue that when you buy crypto assets in the hope that they will appreciate that you are just playing and that the gambling winnings are tax exempt. I wouldn’t dispute that investing in cryptocurrencies is a gamble and you risk losing everything, but HMRC imposes special levies on the gaming industry that do not apply to these assets.

This means that HMRC wants its share of the proceeds – one way or another. If you work and get paid in cryptocurrency, this is taxed as income. If you sell, trade, or spend crypto assets, all profits are taxed as capital gain.

Last year, Tesla, the automaker, announced plans – briefly implemented before being canceled – to allow buyers to pay in bitcoin. I met a man who suggested that if he bought a Tesla with his crypto profits, his money would not convert to pounds sterling, trigger a taxable event, and be of interest to HMRC. I said, “But he will have been converted to a Tesla, and that will interest them – very much.”

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Even if you exchange your tokens for another type of crypto asset, you will still be liable for income tax.

Others recognize the tax implications of cashing out their crypto assets, but assume that HMRC won’t know about them and therefore believe they won’t be caught if they don’t report their earnings. This is not true either.

HMRC works with large crypto exchanges, requiring them to share customer information. He now uses this data to send nudge letters reminding investors of their responsibilities and obligations.

There are ways to mitigate the impact of having successfully invested in crypto assets.

We each have a tax-free allowance of £ 12,300. If you record profits below this limit – and remember to factor in gains made on other assets held outside of an Isa repo or wrapper – you will not be subject to income tax. capital gains (CGT). If you exceed this limit, you must pay.

You can donate property to your spouse or civil partner without triggering a CGT event. This can be a good way to effectively double your allowance. If you are a taxpayer at the increased rate and your spouse is a taxpayer at the base rate, the first division of the patrimony is particularly judicious when a CGT invoice is likely to arise from their assignment.

You would pay 20 percent on any gain over the tax-exempt limit. If your partner’s taxable earnings, added to any taxable income for the year, do not exceed the base rate limit – £ 50,270 – they will only pay 10%.

We are coming to the end of the tax year. You could liquidate the assets on either side of April 6 to take advantage of a two-year allocation over a short period.

Losing your private key and not being able to recover your crypto assets does not count as a loss in the eyes of HMRC.

If you are feeling generous, you can also donate a crypto asset to charity. You don’t have to cash it first. You will need to transfer ownership to the charity, which might be easier said than done.

Another thing to know is that you can offset any losses you make with your winnings. It’s important to keep track of them throughout the year, especially if you trade regularly. There is no limit on the amount or number of losses you can compensate. You can even carry over unused capital losses for the next three years if they exceed your gains.

Losing your private key and not being able to recover your crypto assets doesn’t count as a loss in HMRC’s eyes, although I do appreciate that it must feel like someone unhappy enough to be in this position.

Finally, it should be remembered that crypto assets will be property for inheritance tax purposes (IHT) and this will need to be factored into any IHT planning.

It is difficult to understand crypto assets. It is also quite difficult to understand the UK tax system. But if you want to invest in the former, you have to focus on the latter. Failure to do so could leave you with a very painful bill from HMRC – perhaps when you’ve already spent your winnings.

Rebecca Aldridge is a Chartered Financial Planner and Founder of Balance Wealth Planning

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