When an investor realises the value of a crypto asset and makes a profit they may be required to pay Capital Gains Tax (‘CGT’) by the 31 January following the end of the tax year. However, according to HM Revenue & Customs (‘HMRC’) research 84% of crypto asset owners have not sought tax advice and there is concern that many investors are not aware of their potential tax obligations. Tax can be payable even in circumstances where it is not obvious to the investor that a CGT liability has been triggered.
Gains or losses made in the tax year ended 5 April 2022 must be reported to HMRC on an individual’s self-assessment tax return by 31 January 2023 and any tax liability paid by the same date.
Where the profits from the realisation of a crypto asset, including crypto currencies such as Bitcoin exceed the annual allowance for CGT, currently £12,300, or take an individual over this limit when included with their other capital gains and losses for the tax year, then the tax payer must report the gains and pay any associated CGT by 31 January following the end of the tax year.
Equally, a tax payer should report any losses from crypto assets on their self-assessment tax return for the appropriate period in order to be able to offset such losses against other gains from the same or future tax years.
There are a wide range of circumstances in which gains can be ‘realised’ for tax purposes and not all of them are obvious. Tax can be payable even where the investor does not think their crypto investments have been profitable. Selling, lending or ‘staking’ crypto assets, or potentially even just transferring assets between crypto sites and portfolios will usually trigger a disposal for tax purposes. There does not need to be any cash taken out and even if the portfolio now shows that there would be losses if all investments were encashed now there could still be a reportable disposal.
The relative newness of crypto assets means that some of the tax rules remain unclear, and HMRC is concerned that there is a significant degree of underreporting of gains. Tax laws were never written with crypto assets in mind and so the problem can be that the tax treatment of some activities are unclear. HMRC have identified that there is a risk of underreported gains in this area and have a special focus on crypto compliance.
The phased reduction of the CGT annual exemption from £12,300 to £6,000 in April 2023 and then to £3,000 from 2024 will mean the issue of reporting crypto gains will become much more relevant to many investors.
It should also be noted that tax payers who are trading in crypto assets, or receive them for services they carry out, will be subject to income tax on their profits, rather than CGT.
There are also issues for non-domiciled taxpayers with crypto asset portfolios, particularly depending on whether funds have been remitted to the UK for purchases. Individuals resident in the UK but with a long-term ‘domicile’ elsewhere (non-doms) who currently claim the remittance basis may not realise that HMRC regard any crypto investments held by UK residents as UK situs assets, generating income and gains fully taxable in the UK. Experts have warned that using offshore income and gains to acquire a crypto portfolio could well be making remittances and thus triggering UK tax charges at the highest rate of tax. In addition, crypto assets are chargeable for inheritance tax purposes, so that is another aspect non-doms will need to be aware of.
If you have any questions regarding the reporting of gains or losses on crypto assets, please speak to out Tax Director, Jenny Marks.
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