Crypto Tax Tips

Crypto tax tips before the year end

Investors in more traditional investments will be familiar with the importance of reviewing their financial affairs before the 5 April to ensure they maximise their tax allowances and reliefs, but what should those invested in cryptocurrency be thinking about at this time?

The majority of cryptocurrency investors are subject to capital gains tax (CGT) on the profits they make from their trades. A sensible first step would therefore be to calculate what gains have already arisen during the current tax year and establish whether the CGT annual exemption has been fully utilised.

The current CGT annual exemption for individuals, which represents the amount of capital gains someone can make before they suffer CGT, is £12,300. If a crypto investor hasn’t fully utilised their annual exemption in the lead up to 5 April, and is also holding crypto investments standing at a large gain, they may want to consider triggering a capital gain before the tax year end so as to effectively wipe out the capital gains on a proportion of their crypto investments.

The simplest way to achieve this would be to sell the crypto investment on an exchange to a third party. It’s important to note however that special rules exist, commonly known as the ‘bed and breakfasting’ rules, which can result in a disposal being ineffective. This would be the case if the individual reinvested into the same cryptoasset on the same day or within 30 days of the sale. The ‘bed and breakfasting’ rules would result in the disposal being matched to the later re-acquisition and effectively negate a potential CGT advantage.

For some, remaining uninvested in a particular cryptoasset for 30 days may not be an attractive prospect. In these circumstances, it might be worthwhile exploring whether sale proceeds could be gifted to a spouse or civil partner for them to reinvest instead. It’s important to note that any such gift must be genuine, as otherwise HMRC might reasonably challenge whether it is a sham arrangement and that the ‘bed and breakfasting’ rules should still apply.

Similarly, if capital gains exceeding the annual exemption of £12,300 have been crystallised during the year, it is sensible to look at whether any cryptoasset investments are standing at a loss and look to trigger this before the end of the tax year. A capital loss can usually only be used against gains made in the same tax year or carried forward for future years, rather than being carried backwards to past years.

The simplest route would be to dispose of the cryptoasset on an exchange to a third party, again bearing in mind the ‘bed and breakfasting’ rules if there is a desire to reinvest into the same asset in the future.

A loss cannot be triggered by selling the cryptoasset to a spouse or civil partner and similarly, the use of a loss that is triggered from a sale to a connected person (e.g. a relative) is restricted.

However, a transfer of a cryptoasset to a spouse or civil partner should not give rise to a capital gain and this could therefore present opportunities to utilise the CGT annual exemption for two people rather than one.

Finally, investors in cryptocurrency should be aware that 5 April 2022 is a firm deadline for claiming any capital losses that were made in the year to 5 April 2018. As some may recall, the buzz of Bitcoin rose to a crescendo towards the end of 2017 and was swiftly followed by the “great crypto crash” of 2018 as markets tumbled.

Those who suffered capital losses must make a claim for those losses if they haven’t already done so within four years of the end of the tax year in which those losses arose. Usually this would have been done on a tax return, but it is also possible to write to HMRC to make such a claim for a capital loss, something many crypto investors may not be aware of.

Written by: Chris Etherington – Partner RSM UK

March 2022