Although Capital Gains Tax is typically charged when you have made a gain or profited on an asset, there are some exceptions. And in some instances it can be difficult to understand where and when the tax applies, particularly for alternative ‘assets’ such as art, wine or cryptocurrency. Peter Webb, our Head of Tax Advisory, gives an overview of Capital Gains Tax and its reach.
Capital Gains Tax (CGT) is generally charged at the point where you sell, gift, dispose of or transfer an asset. CGT bills have increased significantly in the UK over the past decade, climbing from £2.5 billion ten years ago to £9.8 billion in 2019/20.
But although those rules apply to traditional assets, such as property or shares, is there a different approach for alternative assets?
One area which has grown in prevalence in recent years is the holding of cryptocurrency. Cryptocurrencies fall under the broader definition of cryptoassets.
How are cryptoassets taxed?
There’s very little specific legislation for the taxation of cryptoassets; hardly surprising given the technology is evolving rapidly and can be difficult to understand. HMRC’s current view is that, in most cases, individuals will hold cryptoassets as a personal investment and be subject to CGT (currently at rates of 10% and 20%) on disposal.
However, there’s a risk that if you’re perceived as an active trader, Income Tax rates would apply. This can be significant given Income Tax rates are far higher than CGT rates, sitting currently at 20%, 40% and 45%.
Even more complexity can arise when attempting to calculate any taxable gain, especially given transactions may not be in Sterling and the daily volatility of the crypto market can make valuations difficult. Different types of cryptoassets are classed as separate assets too, so swapping Bitcoin for Litecoin is a taxable disposal even though you don’t receive any actual currency.
And if you make a loss on your transaction, you can offset it against other chargeable gains but you can’t set it off against your income.
You might receive fees or cryptoassets for mining cryptocurrencies and validating cryptocurrency transactions. It’s worth bearing in mind that any fees and value of the crypto currencies received are more likely to attract Income Tax rather than CGT.
Non-domiciled individuals and cryptoassets
Another complication is that cryptoassets don’t have a physical location or exist anywhere. However, determining their location is particularly important for non-UK domiciles who are tax resident in the UK. This group can exclude overseas gains from UK tax – as long as various conditions are met.
The UK tax authorities take the view that, generally, cryptoassets are situated where the beneficial owner of that asset is resident. Therefore, if a Bitcoin owner is UK resident, then any gains will attract UK tax – and there won’t be the opportunity to exclude that gain from UK tax just because of a non-UK domicile.
There are other complexities, especially if your overseas income and gains has been excluded from UK tax but you then use it to buy cryptoassets. There is also ongoing debate over whether this type of ‘asset’ should be considered as inside the Inheritance Tax net for a non-UK domicile who is UK tax resident.
Clearly this is an evolving area, but an important one to keep an eye on. Although cryptocurrency is an asset, it’s worth noting that it sits at a speculative, very high-risk position. As with any asset, understanding when and where tax applies is not a straightforward process, particularly if you live or work overseas. In October 2021 HM Revenue announced they will be writing to selected taxpayers to encourage them to review their Tax Returns to ensure all income and gains from cryptoassets have been properly declared.
Please contact your nearest office to discuss any aspect of your own tax position.