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Cash out crypto winnings? Beware of CGT trap as taxman cracks down on Bitcoin boom
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Cash out crypto winnings? Beware of CGT trap as taxman cracks down on Bitcoin boom

Bitcoin surpassed $89,000 for the first time, with the cryptocurrency buoyed by the effects of Donald Trump’s victory in the US election and the resulting ‘Trump Trade’.

It was trading at $87,040 as of midday Tuesday, having retreated from Monday’s record high.

The rest of the crypto market also saw a boom, with coins such as Cardano, Solana, and Dogecoin also benefiting from the rise.

With a large number of cryptos increasing in value – and many speculators going into hodl (hold on for dear life) mode in recent years – it’s likely that many will want to cash out their gains.

Cash out crypto winnings? Beware of CGT trap as taxman cracks down on Bitcoin boom

Crypto Rise: Bitcoin isn’t the only digital currency on the rise, with countless other currencies reporting massive gains since the election.

However, these investors may also be worried about the tax they might have to pay if they cash out their holdings – or have not thought about it at all, believing that crypto is “secret” and therefore safe from the tax office.

James Carn, of Evelyn Partners, says: “The bitcoin price surge will see many UK cryptocurrency investors taking profits – but how many will know that in certain circumstances they would have to report the sale to HMRC on a legal basis. self assessment tax return?

You will be required to pay capital gains on your crypto assets at different times, for example when you sell cryptocurrencies for real money, exchange one cryptocurrency for another, use cryptocurrencies to pay for something or even if you donate them, including to charity. .

Transfers to a spouse or civil partner are exempt from capital gains tax.

How to calculate capital gains on crypto assets?

CGT applies in these circumstances when your net gains on all of your invested assets exceed your annual allowance.

This means you have to calculate your gain for each trade you make, usually the difference between what you paid for those assets, including transaction costs, and the price you sold the assets for.

You must do this for each crypto disposition during the tax year to calculate your net gain or loss.

Any losses you incur can be offset by your winnings.

Earnings on your crypto assets should be calculated in British pounds rather than US dollars and then converted.

At the most basic level, your CGT liability will be affected by your annual salary.

As a result of the budget, higher rate taxpayers pay 24 per cent on gains from assets, including investments. Additional rate taxpayers, i.e. those earning more than £125,140, ​​also pay 24 per cent.

Meanwhile, basic rate taxpayers, those earning less than £50,271 a year, pay 18 per cent in capital gains.

This is charged against your capital gains deduction of £3,000. If you jointly own assets with another person, you can make double the profit between you without being charged.

Typically, most investors will use their £20,000 Isa allowance to protect their investments.

However, cryptocurrencies cannot be held in an Isa wrapper, meaning this option is not available to crypto investors.

Fallen into a CGT crypto trap?

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How does HMRC track crypto holdings?

Some cryptocurrency holders may have recently received a ‘nudge’ letter from HMRC, stating that you need to check whether you are under-reporting your tax liability.

The letters are part of HMRC’s fight against crypto asset tax avoidance, with the taxman able to track crypto transactions through data sharing agreements and the International Crypto Asset Reporting Framework.

Crypto is by no means a hidden asset class. Blockchains exist as public ledgers, in which all transactions are recorded. These records can, however, be traced back to the asset holders themselves.

Crypto exchanges use users’ personal information to link their identity to their crypto transactions, allowing HMRC to track crypto holdings.

HMRC may request this information from stock exchanges, with stock exchanges legally required to provide it.

Mr Carn says: “The rapid appreciation of crypto coincides with a stricter tax environment for investors in the UK, so if holders of Bitcoin and other digital currencies decide to cash out or make a profit, they need to be wary of a possible tax liability, or they could fall foul of HMRC.

“HMRC has moved closer to crypto profits, where it believes there are high rates of non-compliance, in terms of undeclared gains.”

“The tax treatment of crypto assets can be complex. However, in simple terms, HMRC considers the profit or loss made on the purchase and sale of exchange tokens to fall within the scope of CGT.

“Its guidance states that only in exceptional circumstances will HMRC accept that the buying and selling of cryptocurrencies constitutes a transaction for tax purposes – and would therefore instead be included in income tax liabilities. “

Can a crypto wallet protect me from CGT?

The private nature of crypto wallets may lead investors to believe that their transactions will not be reported to HMRC.

This is not the case.

Crypto wallets are subject to the same data sharing agreements as crypto exchanges.

This means that information about your transactions, such as moving your holdings to another cryptocurrency, will be shared with HMRC and you will be liable to pay tax on any gains.

Again, although private wallets are pseudonymous, giving many crypto investors the illusion of anonymity, transaction history is public and available to anyone.

Blockchain analysis can usually match transaction data with known addresses, allowing HMRC to access personal information and transaction data, meaning it can track your earnings.

Mr Carn adds: “For individuals, the basic message is that if you have sold cryptocurrencies to make a profit during the tax year, you may need to declare this by filing a tax return and you you may owe tax.

“This is even more relevant now that the CGT regime in the UK has become more restrictive.”

HMRC warns that failure to declare winnings may result in additional interest and penalties.

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