Crypto assets and chargeable transactions

Crypto assets are here to stay, but as the ‘new kid on the block’ in contrast to more traditional options, they can cause uncertainty around the area of tax implications.

This is the second in a series of short articles that explore the emerging world of crypto assets, focusing specifically on the tax implications of engaging in transactions and what HMRC is doing to keep pace with this rapidly growing market. This article will focus on Crypto assets and the point at which Capital Gains Tax applies.

For individuals, what is a chargeable transaction?

We covered in the previous article that, based on HMRC’s current guidance, most transactions undertaken by individuals in relation to buying and selling a digital asset (such as a crypto currency or NFT) will be being subject to Capital Gains Tax (“CGT”).

What ‘event’ creates a point in time where tax is charged? At its simplest, if you are buying and selling the crypto ‘asset’ it is the point of sale that crystalises the tax. For example, let’s say I use an exchange like Coinbase, deposit £5,000 and buy 100 ‘Hopecoins’ at a cost of £5,000. Several months later the value has climbed, and I sell for £50,000, taking that ‘fiat’ currency out of the exchange and depositing it back in my own bank account. I have made a gain of £45,000 (minus any expenses such as platform fees if they were charged on the transaction). That £45,000 is the amount I will need to declare as a gain and I will be taxed on it, subject to any allowances and reliefs.

In many cases, however, individuals may not ‘cash out’ their transaction. This often causes confusion with those not familiar with the concept of chargeable transactions. Taking the above example as a starting point, if, when my 100 Hopecoins reached £50,000 value, I then traded them for 1,000 ‘Fearcoins’ worth £50,000 and then retain the Fearcoin holding? My money never leaves the exchange, I do not ‘cash in’, at least in terms of fiat currency. However, from a tax point of view, I have disposed of my Hopecoins and at that point I have created a tax charge on the £45,000 gain. The same applies to selling to stablecoins, which are pegged to the value of a fiat currency. For example, USDT and USDC are pegged to the US dollar. Many investors use stablecoins as a way of ‘cashing out’ but keeping their capital on the blockchain, mitigating risk and saving on conversion fees.

This situation is one we have been asked about several times, with individuals not realising that each reinvestment is creating a potentially chargeable transaction. In situations where digital assets are exchanged, HMRC requires that the GB Pound value of the assets is ascertained at that date and used to calculate any gain.

Changing the second example slightly, what if I traded my Hopecoins for a Range Rover worth £50,000 rather than ‘cashing in’? The result is the same in terms of this being a disposal of my Hopecoins, and CGT will again be due.

HMRC guidance also suggests that transferring assets to a different ledger may create a chargeable transaction, but it is not yet clear in what specific circumstances HMRC will take that view.

Capital losses may be used to offset future capital gains, but losses need to be claimed or ‘notified’ to HMRC within 4 years of the end of the tax year in which they were incurred. If the value of a holding plummets and I cannot sell, I can potentially also make a ‘negligible value’ claim to crystalise a loss if necessary.

Capital gains rules around ‘pooling’ apply to holding crypto assets, different assets must be kept in different pools.

Finally, one quirk that must be mentioned is that NFTs, which are often ‘art’ do not follow the same rules as those that apply to buying and selling physical art. The following assumes that I am not a ‘trader’ in art. The chattels exemption for personal goods means that selling a personal possession for up to £6,000 is exempt from CGT if any gain is made.  Usually, personal goods are sold for less than they are purchased for, so this is not often a point to worry about. Some specific rules also apply to cars and machinery. In terms of ‘art’, this means that if I purchased ten works by an artist at £1,000 each and sold them later for £6,000 each (assuming they were not a ‘set’), the £50,000 total gain would normally be exempt from CGT. However, if I purchased ten NFTs by the same artist at the same price and sold later with the same increase in value, the £50,000 gain would be subject to CGT, based on how HMRC views crypto assets now.

So, to conclude, for most individuals holding a crypto or digital asset, whether it is a ‘coin’ or something else, the rules on capital gains apply and closely mirror those for buying and selling shares or something similar. Selling an asset for fiat currency as well as trading one asset for another will crystalise a gain or a loss. If you have undertaken a series of trading transactions it will be important to keep track of the ‘fiat’ (or pound) value of that trade at each point it happens to be able to calculate your gain or loss. If you make a loss, this needs to be claimed within four years. There can be twists and turns in capital gains rules and this article is just a basic overview.

We’ll consider the question of Individuals and Trading in the next article.

If you have any questions about tax on crypto assets, or tax issues in general please get in touch on 0203 675 8122 or email Jeremy at jeremy.johnson@intaxltd.com.