What is Capital Gains Tax

Capital Gains Tax more commonly referred to as CGT, is a tax on the profit (increase in value) when you dispose of an asset.

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What is the tax rate

Your first £3,000 of gains in a year is tax free. CGT is payable on the excess at 18% for a basic rate taxpayer and 24% for a higher rate taxpayer.

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What is a disposal subject to CGT

A disposal is the:

• Selling of an asset

• A gift of an asset.

• Exchanging one crypto currency for another, for example swapping some Ethereum for Solana.

• Using of an asset/crypto to buy services or goods.

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Please note special rules mean gifts to your spouse are exempt from tax. ​This can give good tax planning opportunities by gifting assets to ensure both spouses use the tax free annual exemption amount and by giving gains to the lower tax paying spouse. 

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What records do I need to keep?

• The date of the transaction

• The amount of crypto bought or sold

• The value of the crypto in GBP at the time of the transaction

• The cost of any buying or selling fees

• Wallet addresses

 

How to calculate your Gain/Loss

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To calculate a gain or loss for Capital Gains Tax (CGT) you follow these steps:

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1. Determine the Sale Price – This is the gross amount you received when selling the asset.

2. Deduct Allowable Sale Costs - These will include gas fees or exchanges selling costs.

3. Subtract the Purchase Price – The amount you originally paid for the asset.

4. Deduct Other Allowable Costs – These include purchase costs i.e gas fees, exchanges fees, improvement costs.

5. Apply Any Reliefs or Exemptions – Some assets qualify for tax reliefs, such as Private Residence Relief for homes.

6. Subtract the Annual Exempt Amount – This is the tax-free allowance for CGT.

7. Subtract brought forward Losses - CGT losses previously claimed can be offset against the gain.

8. Calculate the Taxable Gain – If your gain exceeds £3,000, the remaining amount is subject to CGT.

9. Apply the Correct Tax Rate – The rate depends on the amount of your other income and gains (18% or 24%)

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As an example:

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Solana Sale Proceeds      £15,000

Sale Costs                           (£150)

Solana Purchase              (£5,000)

Purchase Costs                     (£50)

Gain                                    £9,800

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Annual Exemption             (£3,000)​

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Taxable Gain                       £6,800

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Tax Rate                                 18%

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Tax Payable                        £1,224

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This above example is very simple, however what happens if you purchased the Solana on 6 different days at different prices and only sell part of you holding? HMRC have what they call matching rules which will tell us which purchase of Solana is treated as being sold first. The rules state that assets acquired on the same day are taxed first, then assets acquired in the following 30 days and then all other purchased are pooled together and given a average purchase price, from which any remaining sales will be taken from. 

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If you have lots of transactions it is best to use a crypto tax reporting software to help you keep track of all of your transactions. The software can also automatically produce tax reports that report in a way that comply with UK tax law and advise of your capital gains / losses and income in the tax year. This makes the reporting to HMRC significantly easier and can help mitigate mistakes. We work closely with reporting software companies and can assist in producing these reports for you. 

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What happens if I make a Loss?

Capital losses occur especially in volatile crypto markets and where rug pulls of meme coins and small projects are common place. The one good thing about losses is it can help you reduce your tax bill.

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Capital losses can only be offset against other gains and cannot be offset against your general income from employment etc. Losses are automatically offset against gains in the same tax year if applicable. Any remaining losses are carried forward and can be used to offset against future gains. Carried forward losses can be carried forward indefinitely potentially saving you up to 24% on future gains.

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To bank this loss you need to report it to HMRC even if you are not completing Tax Returns. If you have failed to notify HMRC of losses previously you may still be in luck as HMRC allow you to claim them for up to 4 years from the end of the tax year of disposal. For example if you sold Bitcoin on 22 June 2021 for a £8,000 loss you have until 5 April 2026 to claim the loss. ​

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You can also claim losses on assets that you still own if they become worthless or of ‘negligible value’.​​​​

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Please note this text tries to cover the general rules for most taxpayers, however every individuals own tax affairs can be different and professional advice should be sort if you require information on which you can rely.