Capital gains tax (CGT) is a tax that may be charged on the profit or gain made when selling, gifting, transferring, exchanging or disposing of an assets.
There are a number of assets, such as your home, and any personal belongings worth less than £6,000, that are exempt from CGT. However, assets such as shares, collective investments and second properties that generate a capital gain, are generally liable to CGT.
Each individual has a personal CGT allowance every year (6 April to 5 April), which for many crypto investors is sufficient for avoiding a CGT liability. Any gains in excess of the allowance are charged to CGT at either 10 per cent or 20 per cent, depending on the individual’s other total taxable income in the year the gain arises.
Many individuals will never pay it, there are a number of ways in which CGT can be reduced or even removed altogether.’
Below are six things to consider when assessing your CGT liability on your cryptocurrency Investment.
- Make use of the CGT allowance
Every individual has an annual CGT allowance which currently lets them make gains on investments of up to £12,300 free of tax (Fy22-23). If unused, the allowance cannot be carried forward into the next tax year, so it is advisable to use this tax-free allowance each year in order to reduce the risk of incurring a significant CGT bill in subsequent years.
- Make use of losses
It might be wise to sell some assets at a loss if the overall gain in the tax year exceeds the annual allowance. Gains and losses established in the same tax year must be offset against each other, so will reduce the amount of gain that is subject to tax. Losses must be registered with HMRC within four years from the end of the tax year in which the loss has occurred. You’re allowed to deduct certain costs involved with buying and selling ( incidental costs of acquisition and disposal ) Crypto Assets from your gain when working out your CGT bill. These include: transfer fee, exchange fees, gas fee , fee for professional service such and lawyers and accountant relating to the buying and selling the crypto.
- Transfer assets to your Spouse or Civil Partner
Transfer between spouses is currently exempt from CGT. This means that assets can be transferred between husband and wife or civil partners so that both annual CGT allowances are used. This effectively doubles the CGT allowance for married couples and civil partners. The transfer must be a genuine, outright gift.
- Bed AND Spouse
It is no longer possible to use up some of your CGT allowance by selling crypto on which you had a gain, and then buying back the same crypto the next day; or within 30days, this was known as ‘bed and breakfasting’. However, Spouses or civil partners are permitted to buy back the shares sold by their spouse or civil partner immediately, so the gain is realised CGT free while enabling the family to retain the assets.
- Contribute to a Pension
By making a pension contribution (where one has net relevant earnings), the tax on a capital gain can be reduced from 20 per cent to 10 per cent. A pension contribution extends the upper limit of an individual’s income tax band by the amount of the gross contribution.
For example, if an investor is able to make a gross pension contribution of £10,000, the point at which higher rate tax becomes payable will increase from £50270 (limit for 202-23) to £60270. If the capital gain, once added to the other taxable income in the year the gain is realised, falls within the extended personal allowance, the CGT liability will become 10 per cent instead of 20 per cent.
- Invest in an EIS
Any gains that are made on investments in an Enterprise Investment Scheme (EIS) are free from CGT if held for three or more years. If the shares are disposed of at a loss, one can elect for the amount of the loss, less any income tax relief given, to be set against income for the year in which the shares were disposed of – or any income for the previous year – instead of being set against capital gains.
The payment of tax on a capital gain can be deferred where the gain is invested in a share of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period of one year before or three years after the gain arose.
There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation. The downside of EIS is that generally these types of schemes are higher risk than traditional stocks and shares.
