Most people who hold cryptoassets use them for personal investment instead of participating in business-level severe cryptoassets trading. Hence, HMRC mandates individuals participating in personal investment activities to pay capital gains tax on their profits.
Cryptocurrencies are intangible since they are considered digital assets. If the cryptoassets have a realisable value, as well as a capability to be owned by anyone, it counts as a "chargeable asset". As such, that's the primary basis for imposing capital gains tax on cryptoassets.
In this section, we'll dive deeper into how capital gains tax works in different cryptoasset situations.
Disposal is a term often encountered and tied to capital gains tax. Disposal refers to using the cryptoassets in a variety of ways, including the following:
Cryptoassets used as payment for different goods and services
Cryptoassets being exchanged for a different token type
Cryptoassets given away to other people
Cryptoassets sold for fiat money
Cryptoassets sold for stablecoins
All these activities constitute a cryptoasset disposal. As such, you can then determine your need to pay capital gains tax by calculating any gains or losses you get as a result of crypto disposal.
Now, notice that donation to charity isn't listed among the crypto asset disposal activities that merit a capital gains tax liability. That's because you don't need to pay any capital gains tax on charity donation activities.
However, two circumstances may require you to pay capital gains tax on donations:
Tainted charity donations, that is, the person donates cryptoassets with a pre-arranged purpose of directly or indirectly obtaining financial advantages from the charity which received the crypto donation
When a donor provides donated cryptoassets at an amount more than the acquisition cost, hence realising a gain
In calculating gains or losses for capital gains tax, you can declare particular costs as a deduction to reduce your tax burden. These allowable costs include the following:
Any transaction fees paid before the transaction is added to the blockchains
Original pound sterling valuation that was paid for to acquire the asset
Costs of advertising for a vendor or purchaser
Costs covering professional services for contracts regarding disposal or acquisition of cryptos
Costs incurred in making an apportionment or valuation for calculating gains or losses
Meanwhile, the following are not included in allowable costs:
Costs deducted against profits used for income tax filing
Mining activities costs, including electricity and equipment
Some crypto holders may argue that mining costs should be included in allowable costs. However, HMRC's position is that mining is an activity that isn't exclusively and wholly used to acquire cryptoassets. Apart from mining, there are other ways to earn cryptoassets. And as such, this characteristic of mining activity does not satisfy requirements for allowable costs stipulated under Section 38(1)(a) of Taxation of Capital Gains Act 1992.
Pooling is a method used to simplify the calculations for capital gains tax. It is used in shares and securities, as well as cryptoassets. HMRC believes that cryptoassets must be pooled per Section 104 Taxation of Capital Gains Act 1992.
How does pooling work in taxation? Essentially, you assign each cryptoasset type that you have in its own "pool". Then, every consideration (in pound sterling) paid originally for the tokens goes into every pool, thereby creating a "pooled allowable cost".
Now, to illustrate pooling, let's say you have three kinds of cryptos: Ether, Ripple, and Bitcoin. Each of these crypto token types creates one pool. Hence, you now have three pools – one for Ether, one for Ripple, and one for Bitcoin. Each pool of your cryptos will have its own pooled allowable cost associated with it.
If you frequently move, transact with, acquire, or dispose of your coins, then the pooled allowable cost for each of your crypto pools will then change often, too. Anytime you sell tokens from your pools, it shall constitute a " part-disposal". Hence, your pooled allowable costs shall be deducted with the corresponding amount of sale when computing for your losses and gains.
In 2016, Jeremy bought 200 Token A for £2,000. The next year, he bought 50 more Token A for £250,000. So, Jeremy is considered to have one pool of Token A – combining the two sets of Token A, which he acquired in 2016 and 2017. Jeremy has a single 250 Token A pot with a total pooled allowable cost of £252,000.
Now, Jeremy sold 50 of his Token A for £350,000. Jeremy can then deduct a certain proportion of his pooled allowable cost when calculating his gains. To do this, we'll divide the number of tokens sold over the total number of pooled tokens, then multiply the answer by the total allowable costs. The computation for less allowable costs looks like this:
£252,000 x (50/250) = £50,400 less allowable costs
Computing for Jeremy's gain, we have:
£350,000 - £50,400 = £299,600 gain
*where £350,000 is the selling price for 50 Token A and £50,400 is the less allowable costs
As such, Jeremy needs to pay Capital Gains Tax for £299,600. Now, his A tokens pool consists of 200 Token A with a total pooled allowable cost of £201,600.
Should Jeremy sell his remaining 200 Token A, he can now deduct all his allowable costs amounting to £201,600 when computing for his gains.
There are also special pooling rules that apply when these conditions are met:
If you acquired your cryptoasset tokens on the same day, you disposed of tokens of the same cryptoasset type. It applies even if the disposal happened before your acquisition.
If you acquired a cryptoasset within 30 days after disposing of tokens of the same type of cryptoasset
As such, the new cryptos you acquire and its related acquisition costs shall be recorded separately from the pool. Computations for gains and losses will be based on the new tokens' costs that are recorded separately from your pools.
Pio has 15,000 Token B in one pool. His pooled allowable cost for these tokens is £300,000. Now, Pio makes the following transactions:
24 April 2019 – sold 5,000 Token B for £250,000
6 May 2019 – bought 600 Token B for £18,000
Pio's new 600 Token B were acquired within 30 days of him disposing of the same kind of tokens. Hence, these 600 tokens won't go into his existing pool. We subtract it from the 5,000 tokens he sold in April for a total of 4,400. The 600 tokens and the 4,400 tokens existing in the pool are all considered sold.
Here's how to compute Pio's gains for the 600 Token B:
The consideration is computed using the formula value of tokens first sold x (number of new tokens bought/number of tokens sold). In this case, £250,000 x (600/5,000) = £30,000 consideration
Now, let's compute Pio's gains from the remaining 4,400 B tokens from his pool:
Pio's pool now has a remaining 10,600 Token B. We subtract £88,000 (less allowable costs) from the total £300,000 to increase £212,000 as of the pool's remaining allowable costs.
HMRC's pooling method can be quite tricky to accomplish, especially if you have lots of cryptoasset types on hand. While pooling's primary purpose is to simplify calculations, that may not always be the case in practical life. So, it's a good practise to continue tracking every amount spent on each of your cryptoassets.
A loss happens when a person disposes of his cryptoassets for less than the allowable costs. Losses should be reported to the HMRC, most especially if you want to use "allowable losses" to reduce your overall gain.
You can use negligible value claim to crystallise any losses on cryptos that have been reduced to a worthless state. Under this claim, you must declare the following information:
The cryptoasset that is the claim's subject
The date your cryptoassets are treated as disposed of
The amount your cryptoassets should be treated as disposed of
You can file a negligible value claim and report it as a loss at the same time to HMRC. Note that using this claim to dispose of your cryptos will constitute a loss, so you should report it to HMRC.
Misplacing your private key means you cannot access your cryptoassets anymore. However, you still owned the cryptoassets and can be found still existing in the distributed ledger. It's just that you lost the private key that gives you access and control over the cryptoassets.
With these things in mind, HMRC does not constitute lost private keys as a disposal for capital gains tax purposes. But if there is no way to find the private keys anymore, you can file for a negligible value claim. Once HMRC accepts your request, you can crystallise your loss.
Hacked or stolen cryptoassets are not treated as a disposal by the HMRC. Technically speaking, you still own the assets and have the right to recover them from the ones who victimised you. As such, theft and hacking victims cannot claim losses from a capital gains tax perspective.
Capital loss may only be claimed if:
Cryptoassets with a current market value are paid for but are not received by the purchasing person
Worthless cryptoassets are paid for and received by the buyer