HMRC is sending letters to taxpayers who they believe hold crypto assets, advising them of the potential capital gains tax (CGT) implications and linking to relevant guidance. Many taxpayers will be unaware that simply exchanging one type of token for another is a disposal for CGT purposes.
They estimate that more than two million people in the UK hold crypto assets. Although certain transactions will be taxed as income, most are subject to CGT.
HMRC is particularly concerned that people wrongly believe their crypto transactions to be tax-free. The buying and selling of crypto assets is not considered to be the same as gambling.
What is a disposal?
There is a CGT disposal if you:
- Sell tokens (even if the proceeds are not withdrawn from the exchange);
- Exchange one type of token for a different kind of token;
- Use tokens to pay for goods or services; or
- Make a gift of your tokens to another person (unless it’s to your spouse or civil partner).
There is no disposal if, for example, you simply move tokens between different wallets.
For CGT purposes, tokens are treated similarly to shares, so each type of token is pooled.
If tokens are exchanged, an appropriate exchange rate must be established in order to convert the transaction to pound sterling. With more than a few transactions, things can quickly become complicated. Software is available to help work out your tax bill.
An investor purchases a new token using some of their Ether tokens. The new token increases in value, so the investor converts the new token back to Ether. Both transactions are disposals, so CGT will be due if the £12,300 annual exemption is exceeded. There may be no funds to pay this bill, but any further sale of Ether to realise cash will be another disposal, meaning more tax.
The guidance highlighted in HMRC’s letters, which was set out three years ago, can be found here.