How to manage CGT on cryptoassets

  • Describe some of the tax challenges relating to the disposal of cryptoassets
  • Explain how losses are treated
  • Identify the use of 'negligible value' claim
How to manage CGT on cryptoassets
(FT Montage/Fotoware)

During the pandemic years, the world of cryptocurrencies and digital investments reached dizzying new heights in both popularity and monetary value. 

Everyone from serial entrepreneurs to first-time investors pondered whether to dabble in the high risk/high reward (and often very misunderstood) world of crypto. 

However, the world of crypto is not for the faint-hearted. In its relatively short history, trends have shown the market is either boom or bust.

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At the date of writing this article, for many it is currently bust. As investors lose confidence in the crypto sector, there are a number of tax implications for both individuals and companies to be aware of when it comes to crystallising losses. 

How to calculate your gains or losses

For most investors a disposal of a cryptoasset will mean a sale, however, investors should also be aware that exchanging cryptoassets (bitcoin to ethereum for example), using crypto assets as a form of payment for goods or services, or giving away cryptoassets may also be treated as disposals for tax purposes.

After recognising a disposal has been made, the first step is to calculate your gain or loss. When you dispose of the cryptoassets, the taxable gain is calculated by taking your sales proceeds (being the cash or market value of asset received) less your original cost for the asset less any transaction fees that you have paid.

If you are not selling your entire holding of a cryptoasset, then your original cost should be calculated by taking a relevant proportion of your asset cost on weighted average basis.

So, in a simple example, if you bought 10 bitcoin for £10,000 and subsequently sold half of your holding for £3,000 you have made a loss for capital gains tax purposes of £2,000 on that initial sale. If you later sold the remaining holding for £6,500 you will have made a taxable gain on the second sale of £1,500.

Crypto investors should also be aware of the same day and 30-day bed and breakfasting rules when calculating their capital gains and losses. Where investors acquire the same class of cryptoasset within 30 days of a sale then the weighted average rules are disregarded to the extent that the newly acquired shares are matched against those sold.

Following the above example, if you purchased five bitcoin for a total of £1,000, within 30 days of the second sale then your taxable gain on that second sale would be £5,500 because the 30-day tax rules would substitute your weighted cost with the subsequent acquisition cost. As can be seen, timing can make a material difference between the tax and commercial position.

Calculating the matching rules can be tedious, particularly where there are numerous transactions in a tax year (and within the 30 days following the year end).

Serial investors with multiple transactions may want to consider subscribing to a platform that tracks investment activity and calculates tax gains and losses automatically in real time.